Forced Savings Mechanisms
For most homeowners, in their later life, their house is generally their largest and most valuable asset. (We don’t think your primary residence is a good asset, but we’ll explain that another time). But generally, the value of their home equity far exceeds a lot of their other investments like their 401Ks, SEP-IRAs, or other small brokerage accounts.
Why do people’s home generally become their largest asset? Why, even if the stock market had large gains since they time they originally invested versus their house, their house is now generally worth so much more?
There are actually many factors in this. One out of many, is it helps having bank leverage to maximize your return, because with a mortgage you’re able to gain appreciation off the total value of the house, and not your initial down, giving you a more leveraged rate of return. Another, real estate is also generally a safe and good investment vehicle.
But there is another missing factor, one of the most important factors.
One of the main reasons that most people’s house becomes their greatest asset, is because their mortgages act like a forced saving mechanisms. That forces them to constantly save and continually invest money into their house equity.
Becoming rich is all about, spending less than you make, saving that money, and then investing it over time. Consistently and religiously. Thus you must first be able to save the money to invest later.
Unlike other investment vehicles like stocks, bonds, and other vehicles, real estate essentially forces you to pay your mortgage (save money), and continually investing into your house, because if you don’t do that, you’re going to foreclose and be homeless. There is too high of a risk, to not pay your mortgage. Your mortgage becomes the first thing that gets paid, and you are forced into saving on a regular basis.
If those same people had the discipline to also invest their money into other assets on a regular basis, they could also do as well, and those other assets would be just as big if not much larger than their home. The problem is, they don’t have to save. They’re not forced to do anything, they have no pain associated with not saving and investing regularly.
When the end of the month rolls around, they likely won’t save it, and then almost for sure won’t just randomly invest it. Or they just spend all their money too soon. There is nothing forcing them to do anything, and they then don’t constantly continually invest their money for the long term.
This is why we highly recommend people to automate everything. This is one way to ensure you’re forcing yourself to save automatically. Mortgages are a great way to enforce this habit, because they are a forced saving mechanism. People get this benefit without ever realizing the psychological reason, that their homes are now their greatest investment. It’s the one area which they constantly continued to invest in over time, without fail and now it’s worth a lot. Had they been able to realize how important that was, and do it in other investments, they could have done extraordinarily well.
Figure out how to discipline yourself, automate, and setup forced saving mechanisms. Ensure you don’t fail, by not ever trying to invest in the first place. We want to be saving without having to think about it, during strong and bad earning months. You never want to stop it.
How can you set yourself up with forced saving mechanisms?
How can you figure out how to set yourself up, to be an automatic millionaire?
