Components of a Financial Plan
February 12, 2025
The liquidity management paradigm in the commercial banking industry has undergone a drastic change. At one time, liquidity management was driven by constraints such as cut-off times and end-of-day processing. However, with the passage of time, the industry has witnessed continuous technological advancement. The industry now has the infrastructure as well as the regulatory mechanism […]
In the previous article, we have already learned about the repo market. We learned about how the repo market is one of the most important segments of the money market. We also learned about the large volumes of transactions that take place in the repo market. We already know that about $2 trillion to $4 […]
Individual investors are well aware of the existence of pension funds. Retail investors who earn their income in the form of a salary are likely to have invested in these funds. Other retail investors may also have invested in these funds. Almost everyone has heard about pension funds in the news. However, very few people […]
Contracts govern all transactions whether they are between firms or between firms and private individuals. Indeed, in most of the developed world, any transaction or commercial exchange is usually not undertaken without a contract. This trend is also catching up in the developing world where contracts are increasingly becoming the norm. The importance of contracts […]
Sports franchises are also business entities just like other private companies. Hence, it is possible for the owners of these companies to want to sell their stake just like other companies do. If the owner does want to sell off their stake, they need to know its valuation. Also, the valuation of different clubs can […]
Homeownership has been at the center of every American dream for the past few decades. The conventional belief is that buying a home always turns out to be a good investment in the long run. This is the reason why owning a home is considered to be one of the biggest and the most important step which needs to be taken in the life of an individual. There is parental and societal pressure to own a home at any cost. Also, governments all over the world encourage people to own a home by giving tax breaks. Over the years, homeownership has transformed from being a financial decision to a cultural decision.
The pressure to own a house combined with government schemes has created a market where a lot of people want to own a home. Also, with quantitative easing, low-interest rates, and loose monetary policy, the market is flush with funds to enable this dream. However, the problem is that the prices of homes have grown exponentially in the given years. As a result, many people spend too much money on buying a home. This has created a situation wherein the mortgage debt has caused an economic imbalance in the overall budget of these investors. This situation is so prevalent that it now has a name. People who buy too many houses are now known as being “house poor.”
In this article, we will have a look at house poverty and explain how it impacts the overall finances of a person.
Being poor is a situation wherein a person makes less income. As a result, they are not able to meet their financial need. However, that is not the case with “house poor.” House poor are people who earn a decent income. In most cases, these investors earn an income that is close to the median income. However, there is a problem with the way they spend their income. They spend a disproportionate amount of their income on homeownership related expenses such as mortgage payment, home insurance, property taxes, repairs, and upkeep, etc.
Generally, it is advised to keep mortgage payments at less than 25% and total debt at less than 40% of the person’s annual income. However, investors who are house poor spend as much as 70% of their overall income on making mortgage payments.
Since they spend so much money on this “asset” called their home, they find it difficult to meet other discretionary expenses. Since the people are poor because of owning a home, they are called as being “house poor.”
House poverty may be the result of buying a house for personal use. Alternatively, it could also be the result of buying several rental properties that are not cash flow positive and hence eat into the income of the investor.
There are several reasons why people end up house poor. A couple of important ones have been listed below:
There are some people who believe that being house poor is alright since the money is going into a forced savings account. However, that is not the case. Most of the money paid in the initial years towards a housing loan goes towards interest payments. Hence, that money is spent forever, just like the money spent on taking a vacation or buying luxury goods. The money will only come back if the house appreciates, which may be uncertain. Hence, being house poor is as bad as spending too much on vacations or luxury products. Here are some of the side effects of being house poor.
The bottom line is that housing can be a good investment in many cases. However, this may not always be true. Hence, it is important to ensure that one investment is not causing the investors’ financial portfolio and even their life to become lopsided and unbalanced.
Your email address will not be published. Required fields are marked *