Does your home fit into your financial plan?
Apartment, villa, penthouse … the options are endless. And so are the sayings … a man’s home is his castle, there’s no place like home, home sweet home … But placing the emotional aspect to one side, the question, if you are a home-owner, is where does your home fit into your financial plan? And if you are currently renting and considering buying, what kind of home can you afford?
Your home needs to fit into your financial plan. Don’t overextend yourself. If you’re looking to buy, understand that the Israeli housing market is considered expensive, especially given the relatively low salary level in Israel. However, your home can certainly represent equity generated over time (i.e. your long term savings), and mortgage payments will help build that equity. This mortgage acts like a ‘forced savings plan’ and is the main reason why so many couples find their house to be their largest asset at retirement. Because losing your home has such negative consequences, it forces you to make those monthly payments.
However, taking on too large a commitment means that you will feel the extra strain for decades. Many Western olim come from communities where owning a large house is the norm. In Israel it is reserved for those living in the periphery (where housing prices are much cheaper) or were cheaper when you bought – e.g. Modiin, or to those on the upper end of the socio-economic scale. Consider as well the continued total ownership costs after purchasing the property. The larger the property, the larger the overhead (whether it’s municipal taxes, utilities, or just maintenance). If you are spending more than 25% of your income on housing costs, consider carefully if you can really afford it, especially given the fact that many Israeli mortgage payments increase over the life of the mortgage.
However, beyond real estate asset growth, there are other areas of wealth creation that should be part of your financial plan. If your home is currently your only source of wealth, you need to adjust your financial direction. The other two areas of wealth creation are business development and financial asset accumulation.
Even someone with a high salary needs to find ways to accumulate wealth, by putting some of their monthly income into long term financial assets that can grow over time. In Israel, fortunately there are mandated savings programs including pensions (kranot pensia and bituach menahalim policies) as well as advanced training funds (kranot hishtalmut). Fifteen to twenty five percent of your salary should be going into these savings accounts. However, you need to ensure that these savings are properly invested, and that the management fees are not too high. Check your policies to ensure that high fees and commissions are not choking your savings accounts and that your insurance is appropriate for your needs, or else you’ll find your savings substantially reduced in retirement. If you don’t know how to do it yourself, seek assistance from an independent source.
For your long term savings, the Israeli investment scene has often been described as ‘an economic miracle’. Israel has become an increasingly attractive investment option, although many Anglo olim are under-represented in the Israeli stock and bond market. It’s a well-known phenomenon that when English-speakers make Aliyah they tend to leave their money in their home country, which is often a major mistake. New or veteran olim, expecting to retire in Israel, need to match their future revenue sources (for example from fixed income and pension sources) with their future expenses, which will be predominately in shekels. Investing in Israel allows you to accomplish this goal and reduces many of the costs involved with managing one’s assets abroad, while spending shekels.
Understanding and implementing the above points should be an empowering, not debilitating, experience. Proper investing, whether through your home and/or financial assets, should protect — and increase — your nest egg towards a stable financial future. Wishing you much continued Hatzlacha!