As a follow up to Wednesday’s article on our current exploration of renting out our house, I felt like now would be a good time to discuss the greater purpose of saving money.
A couple of days ago I went into some detail as to what we are planning to do with the money we will save. Today I want to try to explain it in a way to will serve as a long term inspiration to anyone, no matter what financial situation you might be in.
Where The Idea Came From
I was reading Frugal Dad’s post on how to insulate kids from financial fears and one of the things he said got me thinking. When talking about encouraging kids to save rather than spend he said:
“Instead of focusing on saving money for emergencies, teach kids to save money for opportunities.”
This is the whole reason I have saved money for years, only I never stopped to put it into perspective like this.
Why do we save money? What is the point of earning money if we just put it all into savings and never see it again?
Let me start off by saying that saving money without a plan and purpose in mind is just as bad as spending it frivolously. Setting goals and saving money for a reason will get you ahead in life, but if you just start hoarding all the extra cash you make, you will die no richer than you are now.
Saving Money For Emergencies vs. Saving Money for Opportunities
A lot of advice you’ll read will tell you to save money for the unexpected. This isn’t bad advice, but if this is where it ends, then you are doing yourself no favors. It is a smart to have an emergency fund for things like, medical bills, problems with your house, or family trouble. Everyone should have some money stashed away for use in situations like this.
The topic that I want to explore further is what saving money for opportunities means.
What Saving For Opportunities Can Mean For You
Imagine you are living life as many people do. You own a house with your spouse and are spending just about 100% of what you make every month. The house two doors down from you goes into foreclosure. It’s been well taken care of, but the family that lives there could no longer afford to pay the mortgage of $1,500. The house is valued at $200,000 but is about to sell for only $150,000 because the housing market is so bad. Sound familiar?
Whoever buys it will get an interest rate so low that the monthly mortgage payments will only be about $1,000/month. You see a foreclosed house but think nothing of it because you can’t afford to do anything with it anyways. You go about your life doing nothing different.
Now imagine a second scenario in which you have been saving for just this opportunity.
You live in the same house, but you have managed to save $1,500 a month for the past two years, and have been actively seeking a way to use this money as an investment. The foreclosed upon house is going to sell for $150,000, only this time, you have the chance to do something about it.
Being Ready When Opportunity Arises
With $36,000 in the bank, you are now able to seize the moment and make an investment that can potentially make you hundreds of thousands of dollars in just 5-10 years.
After some research, you learn that similar houses in the surrounding area rent for about $1,500/month, about the same as the previous owners mortgage payment. The only difference is that if you could buy that house right now, your monthly payment would only be $1,000, $500 less than the potential rental amount.
The housing market is hurting, and prices are at an extreme low. If history is any indicator, in the next 5-10 years, that same house will be worth almost double its current value
You decide to purchase the house and put $30,000 down to avoid private mortgage insurance costs, while still being able to keep $6,000 for any repairs you might have to do right away. Your mortgage on the rental house is $1,000 a month and you find responsible renters that are willing to pay $1,500 each month.
Over the next 5 years, you earn $30,000 profit from rent alone. Of course, $10,000 of this money goes towards fixing things that have broken over the years, but you came out $20,000 in the black.
It may not seem like 5 years of playing landlord was worth $20,000, but you look at the bigger picture. You look at the housing market as it stands now. That $30,000 you put down on a $150,000 house 5 years ago turns out to be the best decision you could have made. You now owe only $110,000 on the house, which is now worth $350,000. You decide to sell.
You sell the house for market value, and after broker and agent commission and paying off what you still owed on the house, you are left with $220,000 cash. By paying your monthly minimum payments for the past 5 years, you have reduced what you owe on your primary house to only $120,000.
You use the $220,000 from your rental sale to pay off your primary home completely. You now have $100,000 in cash, and no monthly mortgage payment. Not only that, but your primary house is now worth $300,000.
Your net worth is $400,000 and it is all very liquid. Since your old mortgage payment on your first house was $1,400, you could conceivably buy a much newer, larger, and nicer home now and pay a smaller monthly payment than you did before.
You sell your primary house for $300,000. By combining that $280,000 (after commission) with your $100,000 in cash you now have $380,000. You find your dream home for $500,000, and since you have still been saving $1,500 a month for the past 10 years, you can easily afford to pay for it completely in cash. You never thought you could afford to live in a home worth this much.
You put all your money into the purchase of your new home. Many people think you are making a mistake, spending all of your savings on this one possession, but you know better.
You know you could have continued living in your current home, saving thousands of dollars every month. You could have used the 6 digits in your bank account to invest further, growing your wealth exponentially for later in life, but that’s not the road you chose.
You bought the one thing you have worked towards your whole life, your dream home. Not only that, but you own it outright.
Where Is Your Opportunity?
Your opportunity to spend money might be right around the corner. Will you have anything saved when it arrives?
Saving money blindly will not help you achieve your goals. Creating a plan and working towards it over the years will.
The somewhere-in-between part is where saving money for opportunities lies. You may not know what you are going to spend the money on in the future, but by saving money and constantly looking for a place to utilize it, you will be able to take advantage of life changing situations when they finally arrive.
What opportunities have come up that you wish you could have taken advantage of?
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