Renting versus buying

HOME OWNERSHIP: RECENT RETURNS HAVE GENERALLY NOT BEEN GREAT

The best approach to saving and investing is one that fits your circumstances. Moneyweb

It’s the type of decision consumers are faced with on a regular basis – should I rent or buy? Apply for a contract or settle for prepaid? Pay cash or swipe my credit card?

Various factors play a role in these decisions and while some may optimise for convenience or cash flow, others argue that numbers should inform the decision.

If you have R15 000 available for accommodation each month, it’s surely better to rent for R8 000 and buy shares for R7 000 rather than buy a place where you pay R12 000 towards a mortgage plus R3 000 for levies, taxes and utilities?

Depending on the assumptions, the maths may indeed show that renting’s better than buying, but whether the reality mimics the assumptions will depend on something one tends to disregard in these decisions: individual behaviour.

Ronny Rent vs Betty Buyer

Ronny Rent may start out well buying shares of R7 000 each month, but if he loses interest after a few months and spends the money, Betty Buyer may be better off, assuming she had the discipline to stick with her strategy.

Home ownership can be costly and recent returns have generally not been great, but it’s a good method of “compulsory” saving. While the consequences of not investing may be largely invisible in the short run, not paying a bond for a few months will land you on the street.

In various financial examples, the numbers show one option is much better than the alternative. Conventional wisdom may suggest someone should pay off their bond as quickly as possible to save interest.

The maths will likely support the assertion, but will it still be the best option if they find themselves out of debt after seven years, only to buy a property twice the size with borrowed money?

Another example: if someone can buy clothes worth R2 000 using cash or a six-month interest-free account, it’s cheaper to use credit (if you consider the interest forgone in a time/value-of-money calculation), but when confronted with the option to pay later, it’s incredibly tempting to spend much

Maths may show that renting’s better than buying.

more than R2 000. Again, behaviour may trump the maths.

Unfortunately, extreme examples of how people retired or became debt-free by 35 often rely on a financial approach unlikely to work for most people, mainly due to behavioural factors.

If not saving for retirement allows you to pay all your debt by your early 30s, that may sound like a great idea. Unfortunately, such extreme examples only work for a small minority who have the discipline to catch up afterwards.

Perhaps the problem with sound long-term financial planning is its lack of excitement and the patience required.

Much like a balanced diet, a balanced, consistent approach to financial wellbeing and saving is the best approach for most people as it’s easier to stick to long term.

Ultimately, the best approach to saving and investing fits your unique circumstances and behavioural make-up.