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Start investing early doesn't always mean buy a home, says 'Financial First Aid' author: 'Homeownership isn't always the most viable option'

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Key Points
  • "Financial First Aid" author Alyssa Davies top piece of money advice for folks starting out? "Start investing early."
  • She doesn't always recommend trying to buy a home, though: "Maybe I'm an outlier, but I think for many people, renting can be a great choice."

For Alyssa Davies, author of the new book "Financial First Aid," building wealth means investing in yourself.

Much of the advice in her book revolves around making sure your financial strategies align with your mental and emotional health. Emergency funds give you a feeling of control and dispel anxiety that can come with financial uncertainty. Paying down debt strategically can double as a powerful form of stress relief.

Ultimately, she says, the most important advice about investing in yourself is about, well, actually investing in markets. Her No. 1 rule for financial beginners aligns with time-tested personal finance wisdom: "Start investing early."

When it comes to another common financial milestone that people view as an investment, however, her advice strays from what many other experts would tell you. "Homeownership isn't always the most viable option," she says. "Maybe I'm an outlier, but I think for many people, renting can be a great choice."

Starting early: 'The advice about retirement is backward'

Getting started in markets early is Davies's top advice for young people because it's the financial move she most regrets not making earlier. "I wish I had started when I was 18. I wish I had known what the appropriate account was, even just putting $20 a month away," she says.

"Knowing what I know now, the advice about retirement is backward," she adds. "Waiting to invest more when you're earning more money is bad advice."

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The math bears that out. Starting early theoretically gives your money more time to grow at a compounding rate, meaning that you have to put much less in at the beginning to have a big impact in retirement.

Say an 18-year-old begins investing just $20 a month and continues on that track until the time she retires at age 67. Assuming she earns an 8% annual return on her money, she'd have more than $147,000, according to Grow's compound interest calculator. If she started 10 years later under the same conditions, she'd end up with just under $65,000.

In fact, even starting at age 28 and doubling her monthly contribution to $40 would still come up short, with a total at retirement of $129,000.

"Beginning to save and invest early on is the best way to live the life you want to live in the future," Davies says.

Homebuying: Don't expect 'a consistent return'       

One of the best investments you can make, the traditional thinking goes, is a down payment on a home. But Davies says that the skyrocketing cost of homes, especially in major cities, may mean that those traditional rules may no longer apply.

"Our parents had a completely different experience. We'll never be able to see the returns that they see," she says. "If you buy a million-dollar property today, it's unlikely to grow the way our parents' homes grew."

Why avoid buying when the alternative is renting — effectively paying for an asset that you never get to own? Davies says what you pay versus the return you earn may not be as straightforward a calculation as some people assume.

"People with a mortgage are building equity, but they're also spending on the upkeep for that asset," she says. "In most major cities, it's more affordable to rent, and if you're taking the difference and investing it, you're likely to see a more consistent and higher return."

Davies is a homeowner, but she doesn't factor the value of her home into her retirement plans. "I'm always going to need someplace to live," she says. "And even if I sell my home at a profit, I'm still going to need to use that money to find someplace else to live."

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These days, that has become an expensive proposition, she points out. An extraordinarily hot housing market is good for sellers, but unless they're embarking on retirement in an RV, they'll soon be buyers in that same competitive market.  

And given inflated prices, it's hard to get a true sense of what your house may eventually be worth. "The real estate market has gone up so drastically, you almost have to discount what's happened in recent years to get a picture of what it's looked like historically," she says.

For that reason, she says, "I prefer to rely on my investments over my home. It's much harder to predict what real estate will look like."

The views expressed are generalized and may not be appropriate for all investors. The information contained in this article should not be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product. There is no guarantee that past performance will recur or result in a positive outcome. Carefully consider your financial situation, including investment objective, time horizon, risk tolerance, and fees prior to making any investment decisions. No level of diversification or asset allocation can ensure profits or guarantee against losses.

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