Think of your mortgage as a piggy bank that helps you build wealth over time. Each mortgage payment you make isn’t just a bill—it’s a contribution to your own future. This is because a part of every payment goes toward reducing the principal of your loan, which increases your home equity. Essentially, it’s like being forced to save money, which is great for anyone who struggles with putting money aside regularly.
Why does this matter? Because over time, this forced saving can significantly increase your wealth. Homeowners often end up with a net worth many times greater than renters, largely because they’re consistently building equity in their homes. It’s a bit like having a savings account that grows without you having to think about it, protecting you from spending on unnecessary things and helping buffer against economic ups and downs.
However, it’s not all smooth sailing. The financial markets can be volatile, and past downturns have wiped out gains for many overconfident investors. I learned this lesson firsthand when a director at my firm dismissed the idea of using a mortgage as a forced savings plan, preferring to chase bigger gains in the stock market. Unfortunately, he ended up losing millions when the market turned.
The simple truth is, having a mortgage forces you to save—a portion of each payment automatically goes toward your loan’s principal. This not only builds your home equity but also keeps you from splurging all your cash. While some might see getting a tax refund as giving the government a free loan, I think it’s another way to ensure that you save, because let’s face it, saving on your own can be tough!
After paying off a significant mortgage debt, I’ve had time to reflect on whether treating a mortgage as a savings account makes sense. If the property were my only asset, I might be considered “house rich, cash poor,” a common scenario where your money is all tied up in your home. However, owning property has been less than a quarter of my total net worth, demonstrating the diversity in assets is key.
Moreover, when I compare the amount I’ve paid toward my mortgage to what I could have saved in a 401k during the same period, the numbers are stark. Despite contributing to a 401k, the amount paid off on the mortgage was significantly higher, partly because saving through investment requires more discipline and is less automatic than mortgage payments.
In summary, a mortgage acts as a forced savings account that not only helps build wealth through home equity but also instills a discipline for saving that is hard to replicate through other means. Whether it’s contributing to a retirement account, investing in real estate, or another form of savings, making the process automatic can help ensure financial stability and growth over the long term.
