What’s a Millennial to do? My kids say rents are so high and it’s impossible to save, how can we ever get anywhere? It’s a good question, and I will give you some things to think about that might help.
Of course, this generation is not the first one to struggle to get a leg up. When I was in my 20s and just married, guess what? We couldn’t afford to buy a house in Orange County. Imagine! We ended up moving to a place that we actually could afford, built a house to earn some sweat equity, and came back a few years later with enough money to get our first house in Escondido.
While I can see many obvious ways people just starting out can be more frugal, the response is usually “I work so hard, I deserve a $3 iced tea when I’m in a restaurant, I’m not going to drink water!” Setting aside that I can easily afford an iced tea but I still drink water with a lemon and some Splenda, I think there’s a bigger point here. What our kids are saying is that so much money is needed for a down payment that it’s overwhelming and saving $3 here and there doesn’t matter. It takes way too long to save a down payment; even if you are frugal it will take decades! So we need a better plan.
Looking back on my life I see that having a place to live without a mortgage is foundational to any financial plan. So if you can afford it, my best advice is that you should buy a house and pay it off in 30 years. A big mistake I often see when people move is that they start the 30 year clock over again with a new mortgage and they never get their house paid off. Or they use the house as a piggy bank and borrow against their equity for their kids’ college or wedding expenses. It should be your #1 goal to stay on track and get that house paid off by age 65.
But what if you can’t afford to buy a house to live in because you live in an expensive part of the world like San Diego? Then buy a house someplace else where you can afford it, and rent it out. We bought a place in Yuma last year for $107,000 and at $900 a month rent the tenant will pay it off for us in 15 years. Can you save the down payment for that? Sure you can. Now it doesn’t look so overwhelming… you actually can save a down payment by just being frugal for a few years. And if you’re 30 when you buy it, then guess what? When you’re 45 you will have a free and clear house.
You say you don’t ever ever want to live in Yuma? Then sell it and use the money to buy somewhere else and have the tenant pay that one off in another 15 years. I’m just using Yuma as an example. My point is that you will at least have a house somewhere that you own outright. The hard truth is that you will be 60 someday even if you do nothing, and you don’t want to be in a position where you have to rent for the rest of your life.
If the idea of saving even that smaller down payment is still daunting, then start buying some silver and gold with your extra cash. Saving money in a bank is a losing proposition because your purchasing power is declining faster that you can save. In other words, if you need $10,000 for a down payment, by the time you save that up you will need $15,000 and so on, and you never reach the goal! At least, owning some precious metals protects your purchasing power for the future day when you will need it. For me, I enjoy going to the coin store and walking out with a new coin, and I’ve done that off and on for decades. It makes me feel like I am working for something. What’s depressing for people is to get to the end of the year and feel like all they accomplished was working and paying the bills. At least I could say I had 10 gold coins at the end of last year and at the end of this year I have a few more. So I felt like I was making progress.
And one last tip: if you have a 401k and your employer matches your contribution, then by all means take advantage of that! It’s free money and you can save for a house twice as fast by using your employer’s 401k match. The way you do this is by borrowing money tax free from your 401k to use as a down payment. There’s a similar rule for IRAs that allow you to use some of that money as a down payment for your first house… check with a tax professional for the latest IRS rules.
The bottom line is that even if you live in an expensive area like San Diego, you don’t have to pay rent forever and have nothing to show for it. By getting some solid financial advice and having a plan, you really can achieve the goal of a free and clear house by the time you retire.