Balancing the Tightrope of Home Ownership and Investing

By guest author Robbie from Stock Street is a website helping beginner investors navigate the winding road to investing.

My girlfriend and I have been together for five years, and we often talk about saving and investing. Even though my pre-financial blogging career involved helping individuals with their finances, my girlfriend still doesn’t quite believe me when I warn her to save more cash before buying a piece of real estate (guess I can’t convince everyone 🙂 ).

My girlfriend and I often talk about the balance between buying a piece of property, saving cash, and investing in the stock market.  My advice to her has been to avoid purchasing real estate until she has enough cash saved for a downpayment so she has liquidity.

Like many people, my girlfriend has an urge to purchase a piece of real estate.  According to her, “Everyone says renting is terrible and you should buy a property instead”.

This is her reasoning, yet here I am telling always her to have patience and wait.

One of the ways I have tried to convince her to wait is by showing her that she can invest some money in the stock market as she builds liquidity to buy a piece of property.

The way I see it, this can kill two birds with one stone.

Whether she listens to me or not, my girlfriend has the right mentality – investing, home ownership, and money management, are important to manage as early as possible.

Prevent Unnecessary Debt

My main concern for my girlfriend is to help her avoid unnecessary debt.  I believe a piece of real estate is a perfectly fine and worthwhile reason to hold debt.  In fact, it is not the real estate I am concerned with, but the potential hidden costs that can occur with a home.

When the AC goes…

I had two friends who purchased a property three years ago.  They moved in, bought new furniture, spent some money on renovations, and stayed within their budget.

A few months after they settled in, their air conditioning unit went.  Living in Florida, not fixing your air conditioning isn’t exactly an option, so they purchased a new air conditioning unit.

This set them back over $2,000, and their budget was completely broken.

I keep telling my girlfriend a new home can come with these unforeseen costs, and that she needs to have enough to purchase property AND deal with any potential costs in the future.  The last thing she needs is to add the majority of her money into her property, then have a $2,000 credit card bill and pay 20%+ interest if something goes wrong.

The solution I have tried to create for her is to invest some money in the stock market to satisfy her craving to invest for the future.  As she invests a portion in the stock market, she can subsequently save cash for her real estate.

This can both help her both prevent a risky financial decision, and allow her to save for her future.

Time Is Money

My girlfriend is completely correct in her desire to invest as soon as possible.  Every year someone waits to invest, they lose money (this concept is called lost opportunity cost).

If you could go back in time 5 years and invest $5,000 into a simple S&P 500 index fund, that $5,000 could be worth over $6,600 if it grew at just 6% over that time period.

Of course, over the past 5 years, the S&P 500 index has returned over 10%.  With this rate of return, the $5,000 you could have invested 5 years ago would be worth over $8,000 today!

And while you have lost out on $3,000 of growth as of today, this just keeps getting worse as time goes on.

The $5,000 would grow to over $16,000 in 20 years growing at 6%!

Imagine every year you don’t invest $5,000, you lose out on $16,000 in 20 years.

This is the beauty of compound interest and why you want compound interest to be your friend, not your enemy.  The further out you look, the more money you end up losing given a positive investment return.

Invest a Portion and Save a Portion

My solution for my girlfriend was to satisfy her desire to invest by adding a portion of her savings to the stock market while she saves a portion of cash to eventually buy a home.

By doing so, she is satisfying her desire to invest for her future AND solving the “time is money” dilemma.  At the same time, she is reducing her potential risk of debt accumulation by creating adequate liquidity.

Investing can be simple

I think I have finally convinced my girlfriend to invest in a simple index fund.  This is a great route to go, and it is something you can do as well.

An index fund has low fees, and you can decide to invest in different strategies, such as a fund investing in the top 500 U.S. companies, or an index fund that invests in the top companies globally.

Flexibility and Emotions

There is a possibility the stock market decreases in value over the short term.  For this reason, I cautioned her to add all of her money in the stock market.  I told her she should keep saving money in cash for real estate, and invest the other portion in the stock market.

This strategy may give her the flexibility for her piece of real estate.

If the stock market performs well, she may opt to use some of the investment funds to supplement her cash savings to purchase the piece of real estate quicker.  If her investments don’t perform well in the short-term, she still has the cash cushion for the real estate.

Separating cash and stock market investments is important because investing can be emotional.

If she earmarks the investments for a piece of property, she may decide to sell the investments if they lose value over the short term.  This is exactly the opposite of what you should do when investing.

Over long periods of time, the stock market should gain value.  However, during short periods of time, the stock market may lose value.  If you sell during that short period of time, you will almost certainly lose out on a portion of the subsequent gain over the long-term period.

For this reason, keeping both an investment account and a cash account earmarked for real estate, should give flexibility and reduce emotional investment problems.

Balancing the Tightrope of Home Ownership and Investing

Whether you are single with no kids, a DINK with lots of disposable income, or someone with a family, it can be difficult to balance this tightrope of home ownership and investing for your future.

By keeping enough liquidity, you may be able to prevent potential liquidity problems with real estate.  By investing a portion of your money in the stock market, you may be able to satisfy your desire to save for your future and to prevent rushing into a real estate purchase.

As you walk the tightrope, if you are able to meet the balance of liquidity and investment savings, you will likely be much better off in the long-term.

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