Opinion
The big home ownership mistake many of us make
Paridhi Jain
Money contributorI’m in my 40s and have no children and divorced some time back. I do have a home that I still have a significant mortgage on, which feels too much now on a single income. I have dabbled in shares, but I don’t really understand that world. When I was married we mostly bought properties, as that felt safer at the time. But now, at this stage, on a single income and at my age, I don’t know if I want to manage investment properties again. I did buy crypto some time ago, but ended up selling for liquidity. So, I’m unsure what the best way forward is, in terms of building up some wealth for my retirement.
Credit: Simon Letch
Let’s work backwards.
The first big goal financially for most people is achieving “financial independence”, better known as “retirement”. Retirement is not an age – it’s a financial position. The point at which your investments can comfortably fund your lifestyle expenses is the point at which you no longer need to earn an active income.
How do you achieve that? For most, this comes down to three core parts: your home, your superannuation and your investment strategy outside super.
Home ownership
The reason home ownership is considered important in Australia is that your home is often your biggest expense. So having a home paid off can significantly reduce how much you need in investments to continue to fund your lifestyle after retirement.
But let me be clear here – from purely a financial perspective, I’m talking about a paid-off home. Not a fancy home. Not a big home. Not a double-storey home. Just a fully paid-off home.
This is where many people shoot themselves in the foot a bit. They make their whole life about their home. They get a starter home, then they upgrade, then they renovate, then they downsize. There’s nothing “wrong” with this – but all this takes up tens (sometimes hundreds) of thousands of dollars (that could have been invested, instead), and decades of their life.
Meanwhile, they’re not simultaneously growing their investments, so they reach retirement with (hopefully) a paid-off home and a little bit in super – but not much else to show for it. The more expensive your home, usually, the longer your journey to reaching financial retirement.
So, the question you need to think about is – how much of your home do you really want or need? It sounds like the mortgage is weighing pretty heavily on you, on a single income. Is it this specific home so important to you that you want to continue paying it off? Is there an option to downsize, which could significantly fast-track your ability to achieve financial retirement? There’s a trade-off here, and you have to decide what’s more important to you.
The big mistake many people make here is buying a bunch of random investments.Credit: Louie Douvis
Investments (in/out of super)
The next bit is having a portfolio of investments that continue providing an income, or you can sell off for a profit to provide liquidity during retirement. For most people, this will be a combination of what they have in superannuation and investments outside super.
The big mistake many make here is buying a bunch of random investments, with no clear strategy on how that’s moving them towards their desired goal. There’s a bit of a glamour to having investments. You can get a sense of accomplishment, for example, by getting on the property ladder, or buying into an asset such as crypto early and watching it skyrocket. But do you have a plan for how your portfolio, as a whole, is going to help you achieve your goal?
So, before you jump into another investment, it’s worth taking some time to understand the fundamentals of investing – how risk works, what are the different risk management strategies (such as asset allocation, diversification etc) that can help you balance the risk and return you need to get to your goals: the difference between active versus passive investing, the difference between a capital growth strategy and an income investing strategy, and how to align all that to your own personal needs, goals and preferences as an investor.
Your superannuation can be a great place to start learning these skills because the money is already invested. If you can wrap your head around super – for example, understanding how to pick a good fund and portfolio, how your money is invested in super, what the different tax concessions are – that will go a long way to helping you understand investing.
Once you understand these foundational principles, you’ll feel more confident in your ability to construct a portfolio using different asset classes to achieve your retirement goal. It’s not about picking one specific investment, such as term deposits or bonds or shares – usually a good portfolio is a healthy mix of different asset classes.
Paridhi Jain is the founder of SkilledSmart, which helps adults learn to manage, save and invest money through financial education courses and classes.
- Advice given in this article is general in nature and not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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