Bills, Bills, Bills… what do I do now?!
If your holiday spending has got you starting the New Year with some new budgetary and financial goals, you need to explore some options to make those goals a reality.
First of all, changing any habit takes more than a “new year’s resolution”; it takes an unwavering commitment, passion and accountability. And quite frankly, most people are afraid to take these steps for fear of failure. However, if you are ready to make a change, read on.
Most homeowners are fortunate enough to have gained a significant amount of equity in their homes over the last several years and as a result, they have the opportunity to strategically remove some of the equity from their homes to give them a jump start on their new financial goals. Before we dive too deep into this, let me remind you that I am absolutely opposed to pulling equity out of your home if you are going to fritter it away on cars, boats and other depreciating items, pay off your credit cards and other consumer debt and then go out and incur more consumer debt. However, when you commit to a sound financial plan, a one-time debt restructuring can save thousands of dollars and help you improve your odds for success over time.
I am a firm believer that managing your home equity outside the home is a much better way to accomplish a goal of financial freedom than by leaving the equity “trapped” in the bricks and mortar of your house, where you have NO control, NO liquidity and NO rate of return. My strategy is based on a four step cash management plan that accomplishes all of the goals listed above and more.
The first step is to have an emergency cash cushion. This is simply a small amount of cash that is available in case of emergency. I typically recommend $5,000-$10,000. This is money that is available so that you do not have to resort to credit cards in response to an unexpected medical issue, auto repair, home repair or something like that.
Step two is to get rid of consumer debt such as credit cards, car loans, boat loans and other types of installment debt. This accomplishes a couple of things. It immediately improves your monthly cash flow allowing you to redirect the payments previously made to creditors, to accomplishing your financial and investment goals. It also allows you to get rid of non-deductible interest expense in favor of deductible interest and possibly receive additional tax benefits.
Step three is to establish significant liquidity. What does this look like? I recommend that clients have at least one year of income set aside in a liquid, safe side fund that is earning a reasonable rate of return. This gives you a significant amount of comfort, control and choice over the use of your money if you find yourself in a situation where you are unable to work, starting a business or to considering an investment opportunity.
Step four is to have your home paid for. However, my definition of having a home paid for is a little different than most. I define having my home paid for based on my personal balance sheet. In other words, having enough money set aside in a liquid, safe side fund that I have control over, which I can use at any time to pay off my mortgage, if I choose to do so. Notice that I said “if I “choose” to do so”. That infers that I may also choose to keep my mortgage for an indefinite period of time. Most of my clients choose this option because it allows them to control and manage the home’s equity outside the house rather than giving control of that equity over to the bank, which is what most people do when they pay mortgage principal every month.
How can you accomplish this plan? As I mentioned earlier in this article, many people have a significant amount of equity that is trapped in the bricks and mortar of their homes earning a 0% rate of return. This equity can be strategically repositioned outside the home giving you the ability to jump start this cash management plan in a significant way.
Keep in mind, if you remove the equity and go to Vegas or waste it on cars, boats, jet skis and other depreciating assets, you will be better off by leaving it in the home. However, if you are committed and passionate about accomplishing your financial goals, this plan can be the catalyst to make those goals become a reality.
Do not let the financial “holiday hangover” keep you from making a substantial positive change in your financial future. Early in the year is a great time to take a look at your current financial situation and ask yourself the following questions: where are you now? Where do you want to go? And how are you going to get there? Then, develop a plan and commit to making it happen.
There are no articles related to this one.
|