In Part I of this article, I mentioned that we were all taught by our parents, grandparents, and conventional wisdom that we should pay off our home mortgage to own our home free and clear so that the bank can never take our home from us. I explained why this way of thinking is outdated. In this article, I will present some ideas on using mortgages as a tool for wealth accumulation.
Let me say up front that I am not advising you to go out and do the things I am talking about without first educating yourself and getting advice from a trained and licensed professional. Although I firmly believe that what I'm about to tell you is a great strategy for wealth accumulation, there is also no one strategy that is right for everyone, as we all have different goals that require different action plans. Furthermore, for a dishonest or unskilled financial advisor (loan officer, accountant, financial planner, etc.), it would be.) very easy to take advantage of you or mistakenly put you into a product that will cost you time and money instead of helping you become financially independent.
Before we talk about releasing your equity and investing, make sure your finances are in order. There's no use taking equity out of your home to start investing if you're weighed down by a massive debt load and forced to use your credit cards every time an emergency arises. I recommend to my clients a three-step model that conservatively builds a solid financial foundation before using equity to increase net worth. This three-step model has the following parts, in order of priority: build cushion, get rid of "bad" debt, and create and maintain liquidity.
I think it is absolutely necessary for everyone to have a small cushion in a savings account to cover life's little emergencies and not automatically reach for a credit card or borrow money. We are not talking about a lot of money here – usually around half of a family's monthly income. When the total income of the family 8.000 US dollars per month should be 4.000 US dollars to cover it. If income is commission-based or somewhat irregular, it's a good idea to increase your cushion to one month's income.
Next, get rid of all "bad" debt – debt with no tax benefits, i.e. everything except mortgages and maybe student loans (car payments, credit card debt, etc.). These should be paid out before proceeding to the next step. If you invest in the market instead of paying a credit card that charges you 20% interest, you would need to make over 20% on your investment to come out ahead! You're much better off eliminating credit card debt first so you can invest your extra cash flow. This can be accomplished by using the equity in your home, but there are also several methods to pay it off month by month. My favorite is the snowball method of making minimum payments on all debt while paying as much as possible each month on the debt with the highest interest rate. Once that debt is paid off, pay the same amount each month, but pay the premium for the next higher interest rate. You will be free of "bad" debt before you know it, and you will have the small rewards of paying off debt along the way to stay motivated and focused on your ultimate goals.
The last step before starting to invest is to create and maintain liquidity. I advise you to have six months' salary in a safe, liquid place like a certificate of deposit, money market fund or other conservative liquid investments. This way you can 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 needed for extenuating circumstances such as job loss, health problems or major unexpected expenses. They have a significant safety net and sleep better at night!
After these three steps are completed, we can consider an investment. Depending on your financial goals and risk tolerance, my advice is to look at a mix of stocks, bonds and real estate. You should always take some time to educate yourself before jumping into any type of investment. There are many resources available to learn more about investing 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 very passionate about investing in real estate and are here to be a resource to you in this area.
In general, I believe people should be financially diversified, which means your assets should not be tied to one asset – especially your home! By freeing up your home's equity and investing in a variety of asset classes and areas, you reduce risk while increasing your potential returns. Investing in stocks allows you to participate in great companies and share in their success without having to spend time and energy actually working on the company. Investing in bonds provides steady income while lowering the overall risk of your portfolio. Finally, in my opinion, real estate offers the most accessible, least risky and most exciting way to get rich slowly.