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Basic Rules for Financial Freedom: Make Wealth Happen

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Slide 9

Don't Rent, Buy


We all need somewhere to live. We, therefore, have the choice as to whether to rent the roof over our head or buy it. Most of us can't afford to buy outright (I doubt you'd be reading this book if you were in this category), so to buy, we need to borrow a lump sum of money to buy with. But hang on. Haven't we said that borrowing is bad, bad, bad, and we shouldn't do it? Haven't we said that this way madness lies, because you pay so much interest on what you borrow and so on? Indeed we have.

So how can you own and not borrow, buy and not have a mortgage?

The answer is that a mortgage can actually be viewed as an investment rather than a borrowing. If you buy a property with a mortgage, you make a monthly investment. The fact you pay that to a mortgage company we can gloss over. You see, in the longer term (and if you're lucky, the shorter term, too), you can reasonably expect that the interest you pay on your mortgage will be less than the increase in the value of your property. What you are banking on is that the value of your home will, in the longer term, go up and, therefore, you have invested whatever deposit you put down and your mortgage money.

Renting, on the other hand, is not an investment. You will never see that money again. Of that there is no doubt.

With a mortgage, you stand a good chance in the long term of seeing your mortgage payments lead to an increase in the value of your house. When you sell, you get that increase in value.

There are those who believe that buying your home instead of renting brings with it huge stresses and means you have less fun. It's actually not the ownership that causes stress, it's how much you borrow to do it and what that means for your overall financial picture. The lesson is to think carefully about how much your mortgage repayments will be and that you are able and willing to pay them.

Next: Build a Bit of Capital; Then Invest it Wisely

From The Rules of Money Copyright © 2007, FT Press. Used by permission of FT Press, and Pearson Education. All rights reserved.

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