Author Topic: New graduate: Should I aim for mortgage first or begin investing?  (Read 686 times)

MrOnyx

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Hi all! My first time posting here. I've been reading the blog for a short while now (a few months or so), and I believe I can live the Mustachain life (sorry if that's considered a cheesy thing to say here!)

I am extremely fortunate and, frankly, very thankful to the person who pointed me in the direction of MMM and Mustachianism in general - as I arrive here as a wet-behind-the-ears graduate. I recently graduated uni (graphic design) and landed myself my first graduate job. Excellent! It's nowhere near the big-city graduate salaries one might expect because I live in a medium-sized town, but it's very close to the average graduate salary in my field. Either way, I'm happy to have done this well already. It's also HUGE for me to have discovered this blog so early on, too. I'm glad I learn of this now rather than ten or even twenty years of frivolous, consumerist, debt-conjuring spending down the line.

Without knowing, I had already done a few of the things MMM did, and would advise; I saved money on uni by doing a course at my local college - a bikeable 2 miles away (though shamefully I didn't bike, something I've taken on board) - meaning I could continue to live with my parents.

For the sake of getting to the point, however, I ask this: As someone who does currently still live with their parents and who has just started their career, should I be saving up and aiming for a mortgage, or use this precious low-cost time to begin an investment portfolio? Yes I pay rent to my parents and I feel like I'm pulling my weight of living there and being support by them, but I just want to know, from a financial point of view, which is the better choice for me?

In case it matters, as I'm sure it does, I live in the UK.

Thanks!

Trifele

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Re: New graduate: Should I aim for mortgage first or begin investing?
« Reply #1 on: April 16, 2018, 07:56:54 AM »
Welcome aboard!  And congratulations to you for starting on this path so young -- you'll do great. 

What are your goals?  I think you may need to start by examining those.  Do you want/intend to buy a house, and when?   

MrOnyx

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Re: New graduate: Should I aim for mortgage first or begin investing?
« Reply #2 on: April 16, 2018, 08:05:39 AM »
Thanks!

My goals are quite simple, really. I obviously want to move out at some stage, although I'm in no rush and thankfully have great parents that - while they may joke about it - are not pushing or pulling me either way. All I want is to not spent my whole life at a desk. I love what I do, but variety is the spice of life. I want to retire while I'm still young enough to enjoy it to its fullest. I said to my dad that I'll be retired when I'm 35 - just to put a number on it (I consider this twelve-year retirement sprint quite optimistic, but we'll see what happens)

Buying a house is something that, as I understand it, you generally don't lose money on - especially if you buy at the right time. I know that much. Therefor, yes, I'd like to own a house at some stage, and I want to avoid rentals for as long as possible.

I'm single at the moment, but I'm open to the concept of settling down, having the *money talk* and having children (preferably with retirement happening before the kids part if possible!)

Thanks again for your reply, Trifele.

Edit: grammar and typo correction
« Last Edit: April 16, 2018, 08:07:13 AM by MrOnyx »

Laura33

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Re: New graduate: Should I aim for mortgage first or begin investing?
« Reply #3 on: April 16, 2018, 08:13:42 AM »
Pure math says throw your money into the market.  The power of compounding is amazing -- you can get a big-picture view with the Rule of 72, which says that the interest rate x years to doubling always equals 72 (IOW, if you expect the market to achieve an average return of 7.2%, your money will double every 10 years).

The key word there is double, because that makes time your most precious commodity.  If you had $100K to put in the market today, and just let it ride, in 10 years you'd have $200K, in 20 years $400K, and in 30 years $800K.  OTOH, if you start 10 years from now, in 30 years you will have only $400K, because you miss that last doubling.  Think about that:  same amount of money invested, but you end up with half the amount, solely because you waited 10 years to start.  So if your goal is to be FI ASAP, then the best thing you can do is prioritize your investments.

OTOH, life isn't just about math.  What do you want?  Do you want to own your own home, or not?  If you want to own a home, then you need to balance that out against your other goals.  Certainly, having a paid-off home by the time you FIRE gives you a solid financial foundation, so where does that fit into your priority list? 

Really, the point of this entire site is to help you focus on what you actually want (including recognizing that you don't need lots of "stuff" to make you happy, and that there is power in being capable of doing things for yourself), and then to prioritize and plan to figure out how to get there.  So start off figuring out your vision of your best life -- what would that look like?  Where would you live?  How long are you interested in working?  Do you want a family, and/or travel, and/or a hobby/side hustle, etc.? 

Of course, no matter what your end goal is, a big fat 'stache will smooth a number of paths.  ;-)  So a nice high savings rate that all goes into investments is a good start, no matter where you want to finish.  Start with this:  https://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/ -- it will show you how your savings rate corresponds to "life in the workforce."

Trifele

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Re: New graduate: Should I aim for mortgage first or begin investing?
« Reply #4 on: April 16, 2018, 08:16:41 AM »
Once again, good on you for being so thoughtful about all this.  It sounds like 'FI by 35' is your primary goal, and buying a house would be just one piece of the financial puzzle, rather than something you place intrinsic value on.   

I would be very cautious about the assumption that buying is financially better than renting.  It depends on a lot of factors.  There are a lot of rent vs. buy calculators out there, and there may be some that are UK-specific.  Here is one for an example: www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

One thing that buying certainly does is to tie up a large portion of your wealth in an illiquid asset.  That may be fine, depending on your plans, or you may choose the flexibility that comes with being a renter.   

MrOnyx

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Re: New graduate: Should I aim for mortgage first or begin investing?
« Reply #5 on: April 16, 2018, 08:41:52 AM »
Pure math says throw your money into the market.  The power of compounding is amazing -- you can get a big-picture view with the Rule of 72, which says that the interest rate x years to doubling always equals 72 (IOW, if you expect the market to achieve an average return of 7.2%, your money will double every 10 years).

The key word there is double, because that makes time your most precious commodity.  If you had $100K to put in the market today, and just let it ride, in 10 years you'd have $200K, in 20 years $400K, and in 30 years $800K.  OTOH, if you start 10 years from now, in 30 years you will have only $400K, because you miss that last doubling.  Think about that:  same amount of money invested, but you end up with half the amount, solely because you waited 10 years to start.  So if your goal is to be FI ASAP, then the best thing you can do is prioritize your investments.

OTOH, life isn't just about math.  What do you want?  Do you want to own your own home, or not?  If you want to own a home, then you need to balance that out against your other goals.  Certainly, having a paid-off home by the time you FIRE gives you a solid financial foundation, so where does that fit into your priority list? 

Really, the point of this entire site is to help you focus on what you actually want (including recognizing that you don't need lots of "stuff" to make you happy, and that there is power in being capable of doing things for yourself), and then to prioritize and plan to figure out how to get there.  So start off figuring out your vision of your best life -- what would that look like?  Where would you live?  How long are you interested in working?  Do you want a family, and/or travel, and/or a hobby/side hustle, etc.? 

Of course, no matter what your end goal is, a big fat 'stache will smooth a number of paths.  ;-)  So a nice high savings rate that all goes into investments is a good start, no matter where you want to finish.  Start with this:  https://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/ -- it will show you how your savings rate corresponds to "life in the workforce."

Thank you, of course! It does make total sense when you consider compounding. I was wondering if I'd get a better return on investment if I get a mortgage and aggressively pay it off, but when you look at the numbers in this way, it's VERY hard to argue with. Thank you for your insight.

Exactly, I agree (paragraph 4). MMM changed my whole thought process - it's not like I was all consumerist before - I've always been quite tight, and have never liked parting with money, to the point where it's a recurring joke in my family which has persisted for most of my life - and I keep adding fuel to this fire whether I like it or not! I feel like whatever my goals may be, FI and a big ol' 'stash will be a huge boon either way. I know now, for instance, that one thing I DON'T want is to still be working when I'm 60 (or even 40 if I can help it!)

Once again, good on you for being so thoughtful about all this.  It sounds like 'FI by 35' is your primary goal, and buying a house would be just one piece of the financial puzzle, rather than something you place intrinsic value on.   

I would be very cautious about the assumption that buying is financially better than renting.  It depends on a lot of factors.  There are a lot of rent vs. buy calculators out there, and there may be some that are UK-specific.  Here is one for an example: www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

One thing that buying certainly does is to tie up a large portion of your wealth in an illiquid asset.  That may be fine, depending on your plans, or you may choose the flexibility that comes with being a renter.   

Thanks for your guidance. I hadn't really thought much about the flexibility of renting, or even the pros thereof. Of course renting can be a better choice, and if I choose to invest now, I can move out into a rental while continuing to aggressively grow the 'stash without a mortgage to ponder over.

Both of you have contributed a lot for me to think about, as well as some new ideas I hadn't had before, so thank you both so much! Obviously I have time on my side, but that's not to say I'm going to be a slouch about this. I have time to think, though!

(Here's hoping this forum supports multi-quoting...!)

frugaliknowit

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Re: New graduate: Should I aim for mortgage first or begin investing?
« Reply #6 on: April 16, 2018, 11:14:15 AM »
The short answer is it depends on your priorities.

Over time, the more square footage, the more the housing costs (whether buy or rent).  The less square footage you have, the more funds are available from your income to invest.

phred

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Re: New graduate: Should I aim for mortgage first or begin investing?
« Reply #7 on: April 16, 2018, 12:55:02 PM »
House prices don't always go up -- just ask the people who purchased in 2005 or thereabouts.

You need at least a 20% down payment so you don't have to waste money on purchase insurance (or whatever the bank calls it).

So, where to save this money?  Yeah, by investing

teltic

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Re: New graduate: Should I aim for mortgage first or begin investing?
« Reply #8 on: April 16, 2018, 11:00:16 PM »
I've been itching to buy a house for 4 years now, but still haven't pulled the trigger.  The first 2 years I didn't feel mature enough to do so (Alright fine the truth is I lived with my parents, and its hard to beat close to free).  The last 2 years... I'm not even sure (cold feet?).  I'm glad I haven't though.

The first 5 years post school, your salary should explode.  I went from $40k, to $58k in 2 years (I work in corporate finance). My work had a unique opportunity to live in San Diego for 12 months, in which they would pay for rent.  Here I am in San Diego, living for free, and I even have a roommate paying me $1250 a month.  This wouldn't happen if I had a house.

Come next summer, I plan to switch jobs and score about a $85k salary (I watched a coworker with 1 year of additional work experience as me land this number).  The particular company I'm looking at is 40 miles away from where I originally wanted to buy a house.


It may be worth while to rent for the first 5+ years of your career.  Renting feels like "wasting" money, but once you make one good job switch, you feel better about it.  We are at all top highs... People say you should buy now to lock in low interest rates... But its basic math, as rates go up, housing prices go down.  If you plan on living at a home for 30 years, then yes buy while you have the low rate!  For me, renting has been favorable.

MrOnyx

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Re: New graduate: Should I aim for mortgage first or begin investing?
« Reply #9 on: April 17, 2018, 02:30:37 AM »
I've been itching to buy a house for 4 years now, but still haven't pulled the trigger.  The first 2 years I didn't feel mature enough to do so (Alright fine the truth is I lived with my parents, and its hard to beat close to free).  The last 2 years... I'm not even sure (cold feet?).  I'm glad I haven't though.

The first 5 years post school, your salary should explode.  I went from $40k, to $58k in 2 years (I work in corporate finance). My work had a unique opportunity to live in San Diego for 12 months, in which they would pay for rent.  Here I am in San Diego, living for free, and I even have a roommate paying me $1250 a month.  This wouldn't happen if I had a house.

Come next summer, I plan to switch jobs and score about a $85k salary (I watched a coworker with 1 year of additional work experience as me land this number).  The particular company I'm looking at is 40 miles away from where I originally wanted to buy a house.


It may be worth while to rent for the first 5+ years of your career.  Renting feels like "wasting" money, but once you make one good job switch, you feel better about it.  We are at all top highs... People say you should buy now to lock in low interest rates... But its basic math, as rates go up, housing prices go down.  If you plan on living at a home for 30 years, then yes buy while you have the low rate!  For me, renting has been favorable.

That salary explosion is something I'm hoping for at the moment. I'm not ungrateful for what I have, but I'm hoping it does go up. I work for a small business near the aforementioned medium-sized town, so I'm expecting more of a gentle pop than full-blown nuke blast. Also, I don't know if it's the American Dollar-Pound Sterling conversion, but the way you guys talk about salary increases seems totally nuts to me! $40k equates to about 27.9k, and I am currently sub 20k. I think there are several factors to this; the not being in a big city, maybe UK salaries are generally lower, and the field I work in being among them.

Either way, that doesn't stop me from making a start. Eventually, the dividends could well end up paying more than any salary I could want - especially if I do it the lean way!

Thanks for the words. I'm leaning more towards the idea of renting now, at least to begin with. Buying a house isn't urgent - it's especially not as urgent as beginning the 'stash. Cheers!