I came up with the idea for “Start with the House” a few years ago after looking at financial profiles of several hundred home buyers and home owners.  I realized that people have a much greater chance of getting ahead financially when they ‘Start with the House”.

What does it mean to Start with the House?  It means that financial success becomes a lot easier when decisions about home ownership and home financing are made first, then other choices close to home are made next, and lastly financial choices unrelated to where you live are made.

Financial Priorities:

The “Start with the House” idea has financial priorities that give you a specific order for getting things done financially.  The big picture is to protect what you have and want to have, then save some money, and lastly, to grow your wealth.  No sense trying to grow your wealth if you can’t protect what you already have from loss.  For example, what use is a $15,000 stock portfolio with no home owner’s insurance if a tornado destroys your house?  $15,000 won’t be enough to rebuild a lost house.

Turn your home into your castle:

If you were going to turn an ordinary house into a castle, you would have to do some renovating.  First, you would dig a moat around the house. Then, you would make sure there were no tunnels under the foundation of the house that could allow an enemy to sneak in unnoticed.  Third, you would build walls and towers that were strong enough to withstand rocks shot from catapults.  Fourth, you would hire some castle guards with fancy uniforms, but no too many – just a few.

Emergency Cash

Think about it – what could happen to you – good or bad – that wouldn’t be better if you had some cash readily available?  Here are a few ideas to get you thinking – water heater explodes and needs replacement, a tree falls on your house, you get a chance to buy a beautiful Harley Davidson at half of the value, but you need to buy it today.   Good or bad, issues that turn up in our lives are easier to deal with if you have some cash readily available.

Cash is like the Moat around your castle – you can use it to slow down an attack – like paying cash for a new hot water heater rather than using credit cards, or, you can use it when you aren’t being attacked – simply get some water to wash your car or take a drink.

Credit Cards

Credit Card Debt and credit card payments are like tunnels that drain the water from the moat around your house.  It is really difficult to build real wealth while transferring most of your excess money each month to the credit card companies to pay for yesterday’s memories.

As soon as an emergency fund is established, paying off and never carrying credit card debt is the next highest priority.

Real Protection

People know they need home owner’s insurance when they have a house, but their are 3 important things you need to protect:

1. Your Current income
2. Against Lawsuits
3. Your future Income

If you own a home, you need to protect the physical structure with Home owner’s insurance, but, you also need to protect your current and future income so that the mortgage payment is never in doubt, and protect your home against a frivolous lawsuit.

Save for Long Term Goals:

Someday, everyone wants to retire, or at least have more freedom to choose how they want to live.  This takes money, and bad home owning decisions make it harder to save.  The key thing to saving money is to start now!  Paying off a mortgage loan first, then starting to save money is never as powerful as saving money right now while keeping your mortgage current.

Start the habit of saving money now, and your home loan will pay itself off over time.

Pay off your house when you feel like it!

When you have an Emergency Fund, no short term debt, Proper Protection, and savings for other goals, you will pay off your house on time, when you feel like it.

By Starting with the house, and having sound financial priorities like I outlined above, you will succeed financially and be able to take care of the important things in your life!  Let me know if these priorities are valid for you, and share your successes with me, too.

Typical Asset Allocation Picture

Many Financial Planners will talk about “Asset Allocation Strategies” as a way to safely grow your net worth.  Asset Allocation strategies sound pretty complicated to me, so I like to look at “Asset Location” first.

What is Asset Location?

Asset Location is having a plan for where you are going to locate your Assets – more simply, where are you going to store your money.  In terms of Start with the House, Asset Location is one of the final steps.  After you have:

1. Established an Emergency Fund
2. Paid of Credit Card Debt
3. gotten the right insurance protection

You need to start thinking about where you are going to put your money.  For too many people, they don’t think about this – they just try to pay off their mortgage as soon as they can.  I have no problem with paying off your mortgage – I do have a problem if you are paying off your mortgage and don’t know why, or if you are paying off your mortgage early and have more important things to do with your money.

Basic Asset Location

How to look at your Asset Location?

You can look at your Asset Location pretty easily.  I divide Asset Location into four basic areas:

1. Equity in your House
2. Cash
3. Retirement Savings
4. Non-Retirement Savings

So, to do this yourself, add up how much you have in House Equity, Retirement Savings, Cash and non-retirement investments.

To evaluate your Asset Location, you need to consider if the money in each category is

• Liquid
• Safe from loss
• Earning a Rate of Return

Every Asset Class (House Equity, Retirement and Non-Retirement Savings) does better or worse when looked at this way.  For example, Retirement savings should earn a rate of return, but they aren’t normally safe from loss, and they are liquid, but you usually have to pay an income tax  penalty.  Retirement savings end up scoring a 1.5 out of three points.

House Equity, however, fails all three tests – it is not liquid, is not safe from loss, and earns no rate of return!  (Your house may appreciate in value, but the equity in the house doesn’t cause that appreciation, so your equity just sits there…earning nothing).

What to do about your Asset Location

Create a simple chart like I show above for your situation – you can sketch this on a piece of scratch paper using estimates in just a few minutes, then look at what the chart is telling you.

• Do you have too much of one asset class? Then stop putting money there, or plan to shift some money elsewhere
• Is the pie too small?  Focus on building the sections of the pie one at a time – Cash, then non-retirement savings, then Retirement savings, finally House Equity.  Two thoughts here – (1) if you get a match on retirement contributions, go ahead and contribute to that plan to be sure to get the free money.  (2) If you own a house, you will build equity anyway as you send in the payment each month, so don’t send in extra unless you have nothing better to do with your money.
• Do you need to move some money around? Maybe you need to refinance, increase your retirement savings, or focus on building an emergency fund of liquid cash.

If you want to talk about your specific Asset Location, just give me a call at 704-541-1171.

Once your Asset Location is set up right, you will find it is easier to safely keep and grow your wealth so that you can then focus on Asset Allocation Strategies with a financial adviser.

the most important factor about saving money is to start today.  Saving a little today will almost always give you more money than saving more money, but starting later.

Consider this example, and ask yourself, who will end up with the most money at retirement?

“Sarah the Saver” is a hard worker who understands the value of time and the importance of saving.  She starts saving money when she is 16. Each year, she saves $2,000 – roughly 250 hours of work at minimum wage. when she is 16, it is about half of her summer earnings – six weeks of full-time work in the summer. It’s not an unrealistic amount of money for an enterprising 16 year old to earn, while still having plenty of money for current spending.

Saving becomes a habit, and Sarah the Saver puts away $2,000t every year. Even after she begins her career in her mid-20s, she still only saves $2,000 per year.  She invests these savings in a conservative way, using a ROTH IRA account so the investments won’t be taxed. She doesn’t make any wild bets, just puts 40% of her savings into short-term, highly rated corporate bonds. She puts 40% into high-quality “dividend growing” stocks, and puts 10% into gold. Simple.

Her portfolio only produces modest returns. Over time, she earns about 8% a year – mostly by reinvesting dividends and interest payments. Sarah is not worried about getting “rich”, she’s just saving money.  And, it’s pretty easy because she never saves more than $2,000 a year, even as her income increases. She has plenty of money to spend on things she needs and wants, in fact, her friends don’t even know she has this weird habit of saving money each year.  But, she always remembers to save first.

By the time Sarah is 40 years old, she’s contributed $48,000 in savings to her portfolio. At that point, she gets bored with saving and decides to quit. So at age 40, Sarah the Saver becomes “Sarah the Used to be a Saver” – she stops saving money, and now spends all the money she makes for the rest of her life.

“Sam the Spender” doesn’t learn to save as a child and doesn’t even get a job until after college. By that time, he’s so busy buying things – cars, vacations, dinners at nice restaurants, clothes, houses, etc., he never can “afford” to save a dime.

(Fortunately for Sarah the Saver (and her Dad), Sam and Sarah never meet, never fall in love, and never get married!)

Sam wakes up at age 40 and realizes he doesn’t have anything in the way of a retirement fund. So, he begins to save, and he does a great job. He starts putting away $10,000 per year, every year. He knows he’s got to play “catch-up”.  Just like Sarah did, he invests conservatively and earns 8% a year. He reinvests everything, like Sarah. By the time he turns 65 years old, Sam has contributed $250,000 towards his retirement.

Guess who has a bigger portfolio at age 65? Is it Sarah who never contributed more than $2,000 per year and whose savings totaled $48,000 in her lifetime… or is it Sam, who enjoyed his early years, and then saved more than five times as much money?

At age 65, Sarah the Saver’s portfolio is worth a bit more than $1 million. Sam only has 800,000, even though he put over $200,000 more into his account than Sarah did.

How does retirement work out?

At age 65 Sam retires, he stops saving, and starts withdrawing $100,000 a year to live on in retirement.  By starting with just over $800,000, and still earning 8%, Sam makes his money last 11 years – until he is 76 – and now broke.

Sarah waits until age 70 to start spending her money.  So, during the 5 years when Sam is spending again, Sarah’s money is still growing.  At age 76, when Sam is out of money, Sarah has over $1.5 Million and at age 95, she has $2.2 Million and her money is growing faster than she can spend it!

Here are the key lessons from this story of Sarah and Sam:

• Starting early is more important than how much you save
• Compound Interest only works over long time frames
• Watch out who you marry!

Oh yeah, what if Sam misses a year at age 43 since he is not really used to saving?  he doesn’t just lose the $10,000 investment, he loses all the earnings of that $10,000 and the earnings those earnings earn?  he runs out of money FIVE YEARS sooner – just by skipping one year!

Start the habit of saving today, and teach your kids to do the same – who knows, maybe your child will grow up to be a US Senator and save our country by knowing how to save!

One, carry a pad of paper with you wherever you go and document every penny of your spending for 14 days. You’ll be amazed at how much money you’re spending on things you don’t need. 

Two, carry cash and use it instead of credit cards. You’ll definitely spend less because you’ll physically see dollars coming out of your wallet and purse. With credit cards, it is too easy to spend money that you don’t yet have and then end up with Credit Card balances that you can’t pay in full each month.

Three, every time you get a paycheck, go online and pay all your credit card balances to $0.  This way, your balances will always be low, and you will always keep them from getting away from you.  This will maximize your credit score as well.

It’s easy to get your Homeowner’s Insurance when you buy a house, and then forget about it.  The following is a guest article from Nico Iannelli with Medallion Insurance Services, on the importance of regular insurance reviews:

It’s Not Just Home Insurance

 The largest purchase most people make is a home.  Surprisingly, given the importance of this purchase and the impact that losing it could have on their lives, many people not only carry inadequate insurance but also rarely, if ever, review their insurance policies.  When you buy home insurance you’re not just protecting your home, you’re protecting your way of life.  An important question to consider when purchasing insurance is, “If I were sued would my existing personal insurance policies provide me with adequate protection?”

 Sure it’s easy to save money on insurance.  Some agents may say it’s simply a matter of omitting optional coverages, reducing liability limits, under-insuring property, increasing deductibles, or reducing the type of perils a person is insured against, just to name a few.   The problem is, when these options are exercised, one may lose the value that was sought when the coverage was initially purchased. 

 So how do you know the “quantity” of insurance purchased is appropriate to the cost?  To paraphrase a well-known saying, a good agent knows the client; a great agent knows the coverages.  No two home or homeowners are exactly the same.  Everyday someone suffers a loss and discovers his/her insurance protection is outdated.  But then it’s too late.  An important part of an agent’s job is to help clients prevent a loss and get the greatest value for their insurance dollars.  Your insurance agent should try to eliminate costly overlaps, bring your insurance up to date, and provide a full line of quality products to meet all of your personal and business insurance needs.  It won’t cost you a cent to have your insurance reviewed, but it could cost you money if you don’t.

 In event of a catastrophe, many homeowners find that their insurance is inadequate.  Either replacement costs have been woefully miscalculated, or in the case of an older home that must be rebuilt, there is either no or insufficient ordinance coverage, so that rebuilding to code must come from the insured’s pocket.  

 If your two-year-old flat screen TV were stolen, would you be fully insured to pay for the cost one?  You might not be, but you can be.  Homeowners policies are occasionally written on an “actual cash value” basis, meaning the amount the insurance company will pay equals the replacement cost of stolen or damaged personal property, minus a deduction for depreciation.  The result is that you will have to make up the difference in cost yourself.

 With Replacement Cost coverage you get:

• Full cost of replacing the insured items at the time of the loss.
• Complete cost of repairing or restoring the item at the time of the loss.
• Up to 400% of the actual cash value at the time of the loss.
• Any special limits of liability already described in the policy.

 Agents and insurers have not yet begun to educate the public of the importance of adequate insurance coverages, let alone the advantages of earthquake, flood, and ordinance or law coverages.  A prudent agent will periodically review property coverages with clients, taking a careful look at how needs have changed.  For example, the young couple who bought a “starter” home several years ago may have added an addition and swimming pool, purchased a boat, and “his and hers” Rolex watches.  This couple worked hard for the finer things in life and they need to protect their hard work.

If you haven’t reviewed your coverage in more than a year, call your agent, or, call a new agent to get a competing offer.  When you are refinancing your house, make it a point to review your coverage as well.

Most everyone thinks about whether they should own or rent their house in Charlotte.   You should also consider if you should own or rent your Life Insurance.

Here is the difference:

1. Employer supplied Life Insurance is Rented.  You lose that ‘lease’ when you leave that job.  If your health changes, you may find yourself unable to rent new insurance and you could be stuck without protection you need or desire for your family.

2. Term Insurance is also Rented.  With Term Life Insurance, you pay premiums for a specific period of time. While you are paying the premiums, you have insurance coverage.  Once the term expires, so does your insurance.  With term Life Insurance, once you stop making the ‘lease’ payments, you no longer have the insurance.  In the case of company supplied insurance, when you stop working for that company, they quit paying the ‘rent’ for you. 

3. You own Permanent Insurance.  This insurance can either be Whole Life, Variable Life, or Universal Life.  The key difference is that this insurance doesn’t quit on you when you leave a job or when a term expires.

Most people should have a combination of both types of insurance – Permanent and Term.  Just like your house – it’s pretty common to own your primary residence, and rent your vacation spot.  Since you only rent some insurance, it is usually cheaper to rent than to own.  Rented insurance makes it easy to get a lot of coverage for a lower cost.  This is particularly useful for younger families when they are starting out – there are lots of expenses, but the need for the insurance is usually at its greatest.  So, rent some insurance while the cost is low and the need is high, but also buy some permanent insurance for the long term.

As a rule a rule of thumb, I usually recommend permanent insurance to cover the mortgage balance.  This way, as a minimum, your family could always own the home outright if the insurance was needed.  Over time, most permanent insurance will start to build up ‘cash value’, just like a home you own will start to build up equity.  I’ve run several scenarios and what I found is that a properly designed permanent life insurance policy will always pay off the mortgage, and after the 30 years of the mortgage, the cash value can be greater than the amount of the original mortgage.  Compared to a rented Term Insurance policy that will expire about the time a mortgage gets paid off, a permanent insurance policy’s cash value can be a valuable source of retirement cash for a homeowner.

If you are able to benefit from refinancing your house right now, you can do your family a great service by using the monthly savings on your mortgage to make sure you have enough life insurance to protect what is important to you.  If you need to talk with an insurance professional, shoot me an email - I am happy to recommend someone for you.

Last month, Fannie Mae and Freddie Mac all but ended Interest Only Mortgage loans, so the only loans left are Amortizing Mortgages.  (Some borrowers can still get an Interest-Only style mortgage, but they are very restricted now).

If you have ever closed on a mortgage, you probably remember the large stack of paperwork you needed to sign.  A large chunk of that is the “Amortization Schedule”, which is the spreadsheet that shows month by month what the loan balance is projected to be, how much of your payment goes to interest, principal and mortgage insurance if possible.

An Amortizing Loan is simply a loan where your payment never changes, but the amount you pay in interest declines each month as the principle balance is paid down. (Here in North Carolina, the banking commission makes us use two pages of disclosures in the loan application package to explain that one sentence).

The Amortization Schedule is a useful tool for an Annual Review of your mortgage.  However, there is a major problem with the original Amortization Schedule you received at closing.  As soon as you pay as little as $1 extra in principle, the remaining months on the schedule become inaccurate.

When you pay extra principle on your mortgage, you shorten the term of your loan, effectively skipping past months on the schedule.

Here are a few ways to shorten the term of your loan, if that is something you want to do:

1. Bi-Weekly mortgage payments.  This is a separate service from your mortgage servicer that deducts half of a regular mortgage payment from your checking account every other Friday.  There are 52 Fridays each year, so this means you make 26 half payments or 13 full payments each year.  The extra payment each year shortens your loan term.  The problem with Bi-weekly mortgages is that you usually have to pay a fee of up to $400 for the privilege or sending the bank your extra payments.  It seems that they should pay you for sending in extra payments, but they don’t.  Bi-Weekly payments are handy if you get paid every other week so that you can have half your mortgage taken from each paycheck.
2. The ‘Banker’s Secret’.  A book from a few years ago explained the so-called Banker’s Secret.  What this program did was to have you pay the regular payment on the mortgage on the due date, but add in the extra principle from the next month on the Amortization Schedule.  This skips you down the schedule every month and effectively cuts your loan term in half.  The gotcha here is that as you get later on in the amortization schedule, you have larger and larger principle payments to make extra each month.  If you aren’t earning more money each year and don’t desire to put that money into home equity, the Banker’s Secret is actually a secret way for them to get more money from you faster, so that they can lend it out again and earn more interest.
3. Make One Extra Payment each year.  If you get an annual bonus or a regular tax refund, making one extra payment each year allows you to get the same benefit of the bi-weekly repayment plan without having to pay the extra fee.  This extra payment will go all towards principle, and not interest, so it will jump you pretty far down the Amortization Schedule each time you do it.  Maintain this practice for the term of the loan and you’ll reduce a 30 year loan to just over 24 years.

You can contact me for a free update of your Amortization Schedule – even if I didn’t originate your mortgage – I have some pretty good software to create an accurate update.

If you are a “Do it Yourself-er”, download a useful excel spreadsheet and plug in your own numbers.

Paying extra payments on the mortgage feels good for a lot of people.  Don’t fall into that trap of basing your financial decisions on your feelings!  If there are better uses of your money, such paying off other debts, building an emergency fund, or saving for kid’s college expenses – do that first.  Those beneficial decisions not only feel good, but are good for you.

You often have to choose how to balance your savings between “liquid” cash, paying off bills, saving for retirement or college and paying down the mortgage. If the Great Recession has demonstrated anything, it’s that home equity is a poor choice. You can find out a lot more about this in previous blog posts.  I’ve written at some length on this on my blog.

Here’s a sobering statistic from last months ‘good’ jobs report:  44% of unemployed persons were out of work for 27 weeks or more. When someone loses their job, they’ll never say, “I’m so glad I have a 15 year mortgage and have paid $50,000 extra towards principle”. No, at this point, the higher mortgage payment and the equity suddenly trapped in their house is frozen from them.

With a mortgage payment and the need to eat and pay utilities, could you go half a year without a pay check? In today’s ‘new normal’ economy, you need to work towards the day where you can confidently answer ‘yes’ to that question.

If you can’t, often times the mortgage currently in place is a good place to start – either by getting a lower payment to grow savings faster and reduce expenses, or maybe by taking cash from the house and putting it where it can grow, be safe, and be available.

If you haven’t looked at your house equity in light of how much cash do you have available, maybe that is a good place to start.

Your first economic priority needs to be liquid cash.

There are two reasons to have  a ready stash: something good happens or something bad happens.

Good things that require cash:

• Your child is accepted to a terrific (but more expensive than planned) school
• You have an opportunity to invest in a vehicle that will enable you to reach the Financial Freedom Point faster than you planned on.
  
• You get to start your own business
• You get offered a ‘once in a lifetime oportunity’ and need to pay for it

Bad things that require cash:

• Job loss or falling income
• Medical procedures
• An elderly parent in failing health
• Home repairs

A recent Urban Institute study on workers aged 45-79 is troubling:

• Average wages for retirees from long-term jobs (with more than 10 years of service) who continued to work declined by about 39 percent
• Median wages plunged by 53 percent
• Older people displaced from long-term jobs who found other employment experienced average wage losses of about 19 percent

This study shows that we can no longer assume wages and income will always increase or always be there.  Having some cash available can make the difference when life happens – will a setback be a bump in the road or a cliff?

Too many people have too little cash in the bank – blindly hoping that nothing bad ever happens, or if t does, the credit cards, home equity lines, or government stimulus programs will bail them out.

Set a goal for yourself and your family to build to at least $10,000 in liquid savings and then grow it from there. If you are at a big company that has to lay people off to make their quarterly numbers, or if you are in an industry that is struggling right now, you will want even more cash available to you.

In my “Start with the House” philosophy, I place liquid cash at a higher priority than buying a house, paying off credit cards, or saving for retirement.  Having sound priorities for your money will make it more likely that you will succeed financially. 

A lot of people dream about the day when they make their last mortgage payment and they finally own their house “Free and Clear”.  Sounds nice, doesn’t it? Unfortunatley, there are two problems with this dream – that can turn into a nightmare if not planned for.

Even with no mortgage, you can still lose your house.

Try not paying the property tax bill for a few years and see how good it was to pay off the mortgage.  Or, consider what happened to the thousands of homeowners who lost houses when hurricanes pass through town at 100+ miles per hour.  Last time I checked, Hurricanes don’t care if you have a mortgage or not.

Paying off your house each month with extra principal payments is the riskiest way to pay off your house.

Consider your friends or family members in places like Florida, Michigan, or California. If they sent in extra principal payments to their mortgage servicer, what happened to that money as home prices declined?  I know someone with a 15 year mortgage that sent in $2,000 per month to watch their house decline in value by $3,000 every month.  When you send in extra mortgage payments, your lender transfer the risk of the mortgage right back to you.  Put another way, each time you send in extra principle payments, your lender has less risk, and more of your money is now in a place where it can disappear or be destroyed.

If you send in extra principal payments, and then find you need the money back, you may not be able to get it.  It could have disappeared, like it has in some parts of the country, or the mortgage rules or your circumstances may have changed to where you can no longer get your money back.

Another way to be Free of your Mortgage:

If you had wnough money to write one check and pay off your mortgage, isn’t that the same as not having a mortgage?  Strictly from an accounting perspective, it is.  On a balance sheet, if the cash assets were greater than the mortgage balance, you are debt free. Now it just becomes a matter of deciding if you should pay off the mortgage, or keep things the way they are.  Think about it – what if you had a $300,000 mortgage, and $300,000 in investments that were targeted as ‘mortgage payoff funds’. You could write one check whenever you wanted to and eliminate that mortgage.  Or, you might recognize some benefits of having both investments and  a mortgage.

• Grow your savings over time, and after a while, the compound interest you earn will be much greater than the interest you pay.
• Mortgage Interest is Tax Deductible – having the mortgage may allow you to pay less in income taxes and keep more for yourself.
• Your mortgage (if it’s not interest only) will pay itself off over time – just let it do that.
• You have more freedom where to store your money – rather than putting it into the walls of your house, choose where it should best be stored for safety.
• If something happens to your house, you still have your money – separate the house and the wealth to keep both safe.
• Your money can earn Compound Interest if it is working for you.  Inside your house, it is just sitting still doing nothing.

Reaching the Freedom Point

You are debt free when you have enough money to pay off your mortgage.  You could still lose your house even if you have no mortgage, so don’t kid yourself into thinking a mortgage payment is your only threat.

A better goal in today’s economy is to plan to reach your Freedom Point as soon as possible.  Just be sure to plan ot do it the fastest, safest, way possible – store your money where it can be accessed if needed and where it grows for you.  You will be able to decide if you want to pay off your mortgage much faster and safer this way.

If you haven’t developed a plan to reach your Freedom Point by a certain day, give us a call – we can help you create a home ownership plan with a path to pay off your mortgage in the fastest and safest way possible.