What if it was a decision you had to make?
Let me tell you a little story about John and Jack.
Both guys are 21, single and in the same class. Their net worth is approximately the same, a nice €100k. However, both have a very different view on their life. While John is testing his luck in the stock market and trying to build assets, Jack is watching movies and doesn’t care all that much about financial literacy. John believes he can make returns of approximately 8% the coming years and decides to work towards FIRE. Jack, however, puts his money on a savings account so he can buy a house in the near future. Both seem feasible options.
Start of life
The 2 guys undertake actions to reach their goal once they graduate. John decides to rent a modest 1-bedroom apartment for a couple of years to grow his stash and net worth. Rent is estimated at around €600 (yes, cheap rent in Belgium). The portfolio keeps on accumulating.
Jack decides to go house hunting and finds a decent place, fitting his needs and those of a possible family. There is no big luxury, consider it a very normal house.
Total cost: €300,000. (Yes, Belgium is expensive considering real estate). Jack uses his €100,000 savings to pay up front and signs for a €200,000 mortgage. This results in monthly payments of €1,000 at a 2% intrest rate for a 20-year period.
John’s cash flow: €2,100 (paycheck) – €600 (rent) – €750 (food, utilities, others) + €500 (bonus) = €1,250/month (+ dividends but those are immediately reinvested)
John owns assets and keeps buying them. Let’s look at the next 5 years.
So, John has a net worth of around €232,000 after 5 years.
Notice John’s new annual dividend income as well, almost hitting €6,000 of passive income!
Jack’s cash flow: €2,100 (paycheck) – €1,000 (mortgage) – €750 (food, utilities, others) + €500 (bonus) – €200 (costs because of ownership, big repairs…) = €650/month
Jack owns a liability. Let’s look at his future.
The above mentioned number is the estimated price appreciation of his house. We should adjust this number by adding his earnings over the last years. I won’t take into account capital appreciation as savings intrest is fixed at 0,11% and thus negligible.
So, Jack’s total net worth stands at €149,500 (= €110,500 + 5x €7,800)
This makes a difference of more than €80,000 in only 5 years!!!
Imagine this for a 10-year period… Spoiler: John has more than twice Jack’s net worth.
However both have above average Belgian saving rates, the end difference in net worth is huge.
So far for the story, now reality.
As I’m in a perfect position to observe behaviour of young people, something is very remarkable. When people start to have a (small) sum of capital, they buy a house, apartment… whatever. They drain their own funds and start paying off their mortgage. Around 50% of my class has already bought real estate to live in. Most of them still stay at work though. We don’t receive a fat corporate paycheck but we can’t complain either. After graduation, we will earn around €2,100/month without bonuses. In Belgium, this is a very nice amount considered our age range. This amount was used as a parameter in the calculations above by the way.
However John is the winner by miles, almost all people tend to walk Jack’s path. By now I hope it’s pretty clear that I’m more a John-type of guy. The opportunity cost is huge. Nonetheless there might be personal reasons as why to prefer buying.
In my opinion, one should grow his net worth until it’s big enough to take care for itself and then start considering buying something as probably family is going to need shelter and stability in the longer run.
With your current knowledge, would you do things differently at age 21? Would you prefer to be a John or a Jack?