On your journey to financial security and success, many external roadblocks exist. Markets rise and fall, politics impact currencies and apartment rents are up 30% since 2010. But the majority of the roadblocks in our way are self-imposed.
According to a recent study by Bank of the West, one in three Millennials took money out of retirement accounts to buy a home. When we want to make a purchase, it’s natural to look for any available resources, like tapping into a retirement account like an IRA or a 401(k). The problem is, even if we get the money out of the account without paying immediate monetary penalties, the cost to us is great.
Time Value of Money is the fundamental financial concept that “money available at the present time is worth more than the identical sum in the future due to its potential earning capacity. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received.”
Here’s an example-
If you start with $20,000 and earn a 8% interest rate, compounded monthly, after 30 years the future value of your lump sum will have grown to $218,714.59 — of which $198,714.59 is the total interest earnings.
That same scenario, but using 20 years instead of 30, the future value of your lump sum will have grown to $98,536.06 — of which $78,536.06 is the total interest earnings.
Money inside a retirement account enjoys tax-free growth and compound interest, which as you can see, is extremely powerful.
So what’s the impact of a decision like taking money out of a retirement account? In the above example, we’d be setting ourselves back by over $100,000.
As you’re making the massive financial decision of buying a home or renting an apartment, ask yourself “why am I doing what I’m doing?” Why do I want to live in a particular neighborhood? What are the real reasons? Are those reasons worth the price you’ll pay, both now and into the future?
Access to quality schools is probably a good reason. Status is not. All too often, we’re guilty of doing things and making decisions based on how we want others to perceive us. I submit that no one has time for that from a financial perspective.
Gut check time
It’s a grown up truth that no one is coming to save you. It’s up to you to make good decisions. Decisions that will mean less now, but more later. I’m not saying a vow of poverty is necessary, but housing is a massive part of our budgets and we can’t afford to make a bad choice.
I’m writing this because I know you can do it and at we’re all in this together!