Stop Sitting on Your Assets

Is Home Equity A Safe Investment?

Do you know a financial planner?

Quick!  Grab your cell phone and give them a call. 

Ask them this question ... "Do you advise your clients to have more than 2/3 of their net worth tied up into one investment?"

What do you think they’ll tell you?  Well, they’ll likely tell you to quickly diversify. 

What would happen if that investment holding 66% of your assets tanked?  It has happened.  People all over the country are pouring their valuable cash into the equity of their home and they’re unable to get it back when they need it. 

For example, if you were to lose your job tomorrow, would you be in a financial pickle?

Unfortunately, thousands of people experience this horror every day.  Waiters and waitresses, television writers, lawyers, doctors, teachers, none of us are immune. Now you don’t have a monthly income coming in and yet all the money you’ve been putting into your home as equity, you can’t get back out.

Why?

Use Other People’s Money

The truly financially successful never pay cash for their homes, even though they can afford to.

We've talked before about how really astute folks (those who know how money works) like to put their money to work for them rather than let it sit idle.  They take out mortgages rather than use their valuable present-day dollars to pay for their homes. 

The smartest money managers buy their homes with other people’s money – lenders. Why do they do this? 

Would you choose 1¢ doubling every day or $10,000 per week?

The largest expenditure most of us make in our lifetimes is our house purchase. It only follows that our housing or our mortgage payment is going to be our largest monthly expense.

In the mortgage industry, the portion of a family’s monthly cash considered prudent for this expense is between 25% and 40% of their gross income. In addition to being the largest expenditure made, it usually requires a very long-term commitment on the part of the homeowner.

Unfortunately, many people walk into the closing on their home purchase to make this huge commitment not really understanding the financial implications.  This Stop Sitting on Your Assets post is dedicated to explaining the POWER OF COMPOUNDING.

To illustrate the power of the doubling effect, let’s imagine for a moment …

How to Turn $100 into $17,817

Tell me. How old are you? 

Rude question … I know.  But, it’s important to ask.  Why?  Why on earth would it matter how old you are? 

Well, the truth is that your dollar is worth much more to you the younger you are. To illustrate my point, let’s say you spend $100 and several hours of your time going out for the evening. You could go to a play, attend a sports event, do dinner and a movie. Whatever.  (I know there’s not a lot you can do for $100 anymore, but humor me.)

The time you use comes with an opportunity cost, the lost time that could have been invested in reading a good book or taking a pottery class. You get the idea. There are a multitude of choices for those hours and how you could use them.

Now, what about the money part of the evening? Because time affects the value of money, the $100 is a more complicated subject. You probably wouldn’t think about it this way, but the opportunity cost of that $100 bill is different according to your age on the night you spend it.

Let’s say you don’t spend that night out and you take your $100 and ...

Do Wealthy People Pay Cash For Their Homes?

Quick question … which is savvier, paying cash for your home or getting a mortgage? 

Conventional wisdom tells us that it is smarter to pay cash for our homes because it saves having to pay interest to a mortgage company or lender.  The truth of the matter is that the wealthy seem to operate against this conventional wisdom.

The wealthy do not pay cash for their homes, even though they certainly can afford to.  Instead, it's no joke that the wealthy ...