To Pay or Not to Pay Your Mortgages: Part II
In Part I of this article, I mentioned that our parents, grandparents, and conventional wisdom have taught us all that we must pay off our home mortgage in order to own our home free and clear so the bank can never take our home. . of us. I explained to him why such thinking is outdated. In this article, I’m going to present some ideas on using mortgages as a tool to increase wealth.
I want to say up front that I do not advise you to go out and do the things I am talking about without first educating yourself and consulting with a licensed and trained professional. While I firmly believe that what I am about to tell you about is a great strategy to increase wealth, there is also no one strategy that is right for everyone, as we all have different goals that require different action plans. Also, it would be very easy for an unqualified or dishonest financial advisor (loan officer, CPA, financial planner, etc.) to take advantage of you or mistakenly put you in a product that costs you time and money instead of helping you become in financially independent.
Before we start talking about freeing up your estate and investing, let’s make sure you have your finances in order. It won’t do any good to take equity out of your home to start investing if you’re saddled with a massive debt load and forced to use your credit cards every time an emergency arises. I recommend a three-step model to my clients that conservatively builds a strong financial foundation before leveraging capital to increase net worth. This three-step model has the following parts, in order of priority: developing a buffer, getting rid of “bad” debt, and creating and maintaining liquidity.
I think it’s absolutely essential for everyone to have a little cushion in a savings account to cover life’s little emergencies and make sure they don’t automatically reach for a credit card or money loan. We’re not talking big money here, usually about half of a family’s monthly income. If the combined family income is $8,000 a month, then $4,000 should cover it. If the income is commission-based or somewhat irregular, it’s a good idea to increase the cushion to one month’s income.
Next, get rid of all “bad” debt: non-tax-advantaged debt, which means everything except the mortgage and perhaps student loans (car payments, credit card debt, etc.). These must be paid before proceeding to the next step. If you are investing in the market instead of paying off a credit card that charges you 20% interest, then you would have to earn more than 20% on your investment to get ahead! It’s much better to eliminate credit card debt first so you can invest your extra cash flow. This can be accomplished using home equity, but there are also different methods to pay it off on a month-to-month basis. My favorite is the snowball method, which involves making the minimum payments on all debt while paying as much as possible each month toward the debt with the highest interest rate. Once that debt is paid off, continue to pay the same amount each month but pay the extra toward the next higher interest rate. You’ll be free of “bad” debt before you know it, and you’ll have the little rewards of paying off debt along the way to keep you motivated and focused on your ultimate goals.
The final step before you start investing is to create and maintain liquidity. I advise you to have six months’ salary in a safe and liquid place, such as a certificate of deposit, money market fund, or other conservative liquid investments. This allows you to be prepared and have cash available for things like business opportunities, helping friends in need, or taking time off for a vacation. It may be necessary for extenuating circumstances such as job loss, health problems, or unexpected major expenses. You’ll have a significant safety net and sleep better at night!
After completing these three steps, we can consider investing. Depending on your financial goals and risk tolerance, I advise looking for a mix of stocks, bonds and real estate. You should always take some time to educate yourself before launching into any type of investment. There are many resources available to learn how to invest in stocks and bonds. I also recommend working closely with a financial planner to help you navigate the financial markets. At January Financial we are passionate about investing in real estate and are here to be a resource for you in that area.
Generally speaking, I believe that people should be financially diverse, which means that your assets should not be tied to any one asset, especially your home! By freeing up the equity in your home and investing in different asset classes and areas, you reduce risk and increase your potential return. Investing in stocks allows you to participate in great deals and share in your success, without the time and energy of actually working on the business. Investing in bonds provides stable income while reducing the overall risk of your portfolio. Ultimately, in my opinion, real estate offers the most accessible, least risky, and most exciting way to get rich slowly.
In Part III I’m going to cover some of these reasons, as well as why I think everyone should have investment real estate as an important part of their portfolio.