Which is financially smarter – owning your own home or investing?

What's the best way to safeguard your future? Own your own home or have a share portfolio? Well it's not a case of one or the other, writes Frances Cook. In fact ideally you'd do three things.

Ever heard about the curse of lottery winners? They win millions in cash, think they’re set for life, then burn through it all in just a few short years.

While the legend might have been somewhat overstated, it's a human truth that those unaccustomed to big sums of cash can be unwise with it.

Much more common than lottery winning (and generally not as unexpected) is finding ourselves with an inheritance – another sudden drop of money which can trigger us to act irrationally, blow it, and end up worse off than we were to start with.

So when a reader emailed me recently, saying they’d inherited what felt like a significant sum, and were scared to waste it, I understood the stress.

They’d worked minimum wage all their life, then their father had died leaving them with a hearty sum. The reader wanted to use the money to set up their family to have more security, and maybe a holiday now and then.

Nothing fancy; they were considering using 70% of the inheritance as a down payment on their first house, putting most of the other 30% into shares for financial security, with a little set aside for a relaxing family holiday once a year.

However, they’d been sitting on the money for three years, keeping it in term deposits, scared to waste the gift. Too terrified to move, and end up like those lottery winners.

A home that you live in is about security, not returns.

I upset the internet whenever I talk about whether or not your own home is an investment. Sorry Reddit, but I stand by my opinion: your own home isn’t an investment.

Whether switching from renting to home-owning is a good move financially? Now that’s a totally different question.

Owning where you live gives you control over your housing situation. You’re not at the mercy of landlords selling out from under you, or rents creeping up year after year.

Especially if you’ve got kids, or are thinking about starting a family, that stability can be priceless.

There’s also a certain emotional ROI (return on investment) that comes from painting the walls whatever colour you like, getting a dog without asking permission, or just knowing your kids will stay in the same school for years.

That’s not financial return — but it is valuable.

Having a home that you pay off can also, eventually, be a big saved cost. Housing is often the biggest category in people's budgets, so ultimately living mortgage-free is not a saving to be sniffed at.

But for it to count as an investment, it would need to make money for you. And it's very rare that it does. But it will definitely cost you.

A house costs money to maintain. Even when the mortgage is gone, there are still rates, insurance, and general upkeep.

So while owning a home is a major financial win in the long run, it doesn’t generate money, even though it saves it.

Yes, over time property tends to appreciate in value. But if you sell it and reap that profit, you will usually be buying again in the same market. Even people who claim they’re going to sell their house and downsize, thereby freeing up some cash, often struggle when it comes time to do it. Either because they don’t really want to sell their home, or because there’s a serious lack of smaller, cheaper homes on the market.

Investing builds wealth, but there are ups and downs

Unlike a home, investments are designed to make your money grow.

The sharemarket let’s you become part owner of successful businesses, where the entire point is that they go to work, make money, and share some of it with you. Without you having to clock in for eight hours of work.

Those investments can outpace inflation, and help you build wealth. The trick is, you need to make sure you’ve spread the money around several different companies (what the experts like to call “a diversified portfolio”), and it’s a long-term game.

Ideally, any money you put in there stays put for 5-10 years.

This strategy allows you to own a home without falling into the trap of being “house rich, cash poor”.

You don’t want to be someone who, when they're older, technically has a great asset of a house but no money to spend. If you were renting it out it would be making you money – but you need somewhere to live, so you’re not able to access any of the value of that asset.

Planning ahead for this situation by putting some money into shares, then leaving it alone to grow, gives you options.

In fact, a three-way split is even better:

Then you can keep working, paying off the home, and putting a little extra into the shares nest egg.

A core principal of the money world is to diversify – you reduce risk simply by making sure you don’t put all of your financial eggs into one basket.

Your future doesn’t have to be either/or. It can be both/and.

A house can anchor your life. Investments can build your wealth. Savings can smooth out the bumps along the way.

This information in this article is general in nature and should not be read as personalised financial advice.