Personal finance is about finding the right balance between necessities, luxuries and saving, and to know how to do this in a manner that maximizes profits. If done correctly, we can achieve a great deal of affluence even at a modest income.
The first thing to realize is that necessities are not savings and should not be treated as such. This is obvious when it comes to everyday consumption, but not so obvious when it comes to shelter. We need a place to live, and this is no luxury, nor is it savings.
When we buy a place to live, we do so because it's a better deal than to rent. We do our calculations. We figure we're better off buying a place, and we go ahead with our purchase. This calculation shouldn't be measured up against alternative investments, because we're looking at a necessity.
However, if we're considering a house that's larger than what we need in order to be comfortable, we're moving into the realm of luxury. If we can afford it, this kind of luxury enhances our wellbeing. It's also a great way to save if we manage to buy the luxurious house at a good price.
It's only at this point that buying a house becomes an investment. If our dwelling is merely comfortable and well kept, it's not a saving but a necessity.
My book on personal finance assumes that we're already at this point. It's about savings. Necessities are only mentioned initially as the foundation from which we build our wealth.
When my wife and I bought separate dwellings back in 2004 and 2005, we did so out of necessity. The alternative would've been to rent places to live. The fact that I ended up making a lot of money from my purchase wasn't due to some clever insight. Rather, it was due to good luck.
Furthermore, most of the profit from the sale went directly into other necessities. My wife's flat required refurbishing, which I paid for. My financial situation was precarious, so we decided to pay down all debt and put aside cash. What remained after this is what I'd describe as savings, and it wasn't all that much. However, if managed correctly, it should be possible to grow my savings significantly without ever resorting to bank credit.
The strategy I've decided on uses historic ratios for real-estate, land, stocks and gold. I move from one asset class to another only when this is likely to benefit me greatly over the next ten years or so. I'm currently in gold, because that is the asset class that seems the most under-appreciated. I'll move into stocks, land or real-estate if any of these become cheap relative to gold. As long as that doesn't happen, I'll remain in gold.
However, this strategy only makes sense when necessities are already covered. Two of my children in Norway bought their separate flats back in 2020. They bought it with bank credit. Their calculations didn't relate prices up against gold, or any other asset, because their purchases were based on necessity.
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