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.

Here are Six Simple steps you can take to easily create a spending plan that you can live with, and even Succeed with:

Action Step 1 – Set a Goal

Believe me, goal-setting is one of the most important skills you can possibly learn, no matter what field you’re in. 

If you talk to any entrepreneur about how they were able to achieve their success, I guarantee you that one of the first things they’ll tell you is, “I set goals, and then I commit to them.” 

Okay, it’s good to talk about goals, but how exactly do you set them? I recommend that you follow the time-proven S.M.A.R.T. format. Here’s what this acronym stands for:

• Specific
• Measurable
• Attainable
• Realistic
• Timeframe

Be sure to read this for more details on SMART Goals. If they aren’t SMART goals, they are just hopes.

Action Step 2 – See Where Your Money Is Going

The following task is one you must absolutely, positively accomplish – sit down right now (and every month thereafter) and go line by line over your credit cards to determine where your money is going. I guarantee you that the results will be shocking. 

Those “discretionary” items add up. By discretionary, I mean items you don’t need like those weekly $4 cups of coffee, $10 lunches, or $20 dinners. 

And once you’ve identified those items, then you must… 

CUT THE UNNECESSARY SPENDING! 

Remember, every dollar you save on discretionary items can go back to work for you – to pay off debts faster, increase your savings, or grow your business and income. 

Action Step 3 – Find Ways to Save.

Too much of what we spend is just old habit, or automatic payments that occur over time.  For example, I subscribed to a magazine years ago that somehow auto-renews and keeps on coming, even though I haven’t read it for years.  After you know where you are spending your money – look for things to eliminate, and for things that you can do better.  Here are some quick things to find:

• Mortgage rate too high?
• Home owners and Auto Insurance
• Magazine Subscriptions
• Membership dues to groups you no longer participate in
• Telephone plan with un-necessary features

Most people can easily create $300-$500 per month in savings just by finding and eliminating the leakage in their spending.

Action Step 4 – Live Frugally (for a Set Period of Time)

Here’s a simple fact: it’s much easier to save $1,000 by cutting expenses than it is to make $1,000 in income.

A key to budgeting is that you have to be willing to make sacrifices for a definite short period of time (not forever). It’s actually an investment in your financial future! 

As Dave Ramsey, author of The Total Money Makeover, says,

“Live like nobody else today, so you can live like nobody else tomorrow.” 

Make it a game or a contest to spend as little as possible for a period of time.  Then, reward yourself with some of what you saved to make the game enjoyable.  Imagine how much more enjoyable a weekend getaway would be if it was paid for, not with credit cards, but from saving some money by living frugally for a period of time.

In other words, practice financial discipline and accountability today, and you have the potential to achieve incredible financial success in the future.

Action Step 5 – Pay off those Credit Cards and… 

CUT UP THE ONES YOU DON’T NEED! 

To avoid the temptation to use your credit cards, follow this guideline: “If I have to finance it, I can’t afford it.” Or, to put it another way, “If I can’t pay cash for it now, I don’t need it.” 

In my opinion, the only things you should be financing in your life are your vehicle and your home. (And we can talk about the vehicles…)

Having seen well over 1,000 credit reports, the highest scores are always the people that have no more than 1 mortgage, 1 Credit Card, and 1 car loan.  You have to use credit to have great credit, but too much hurts your score.

Never open or use department store credit cards.  Saving 10% on something you don’t really need (See action step #3) stills means you are spending 90% on something you don’t really need.  Avoid the temptation when the salesperson offers you 10% off for a new card – tell yourself that you wouldn’t be offered a discount on this if you really needed it.

 Action Step 6 – Plan Your Spending Carefully

Right now, you’re saying, “Okay, I get the point! I need to budget and budget well on a consistent basis. But, how exactly do I allot my dollars so I cut spending and increase my business at the same time?” 

An excellent question! Although every individual situation is different, here are some guidelines that, over time, will work for everyone:

Guideline 1: Live off 70% of your “take home earnings.”

That’s right, spend 70% on the “have to’s” of your life; for example, food, mortgage payments, utilities, etc.

Guideline 2: Give 10% back to God.

The simple act will pay you back many times over, I guarantee it. If you’re not particularly religious, then give to your community…to a charity…an educational institution, etc. Your church or other institutions have given you plenty; return the favor. 

This is a key to success as it establishes ownership of money entrusted to you – if you see yourself as a trusted steward of God’s money, you will manage it better.

Guideline 3: Use 10% to pay off debt (over and beyond your minimum balance) or for short term savings

If you can’t pay off your debt right away, pay it off on a consistent basis. Never pay just the minimum balance, particularly on your credit cards! Pay a minimum of 10% beyond that amount (even more if you can). Get that monkey off your back!

Once you have eliminated short term debt (everything but your mortgage and car loan), save that money, so when you have an unexpected expense, you never have to reach for the credit cards again.

Guideline 4: Place 10% in investments (stocks, mutual funds, etc.).

Definitely invest for the future! You want your money out there making more money. So, invest wisely and, of course, spread the risk over different types of investments.

Here’s an example of how the application of these guidelines looks in concrete figures. Let’s assume you earn $8,000 a month in take home income. The budgeting breakdown would look like this: 

• $8,000 a month take-home
• $5,600 (Mortgage, Food, utilities, etc.)
• $800 to God
• $800 to debt / short term savings
• $800 investments

One final piece of advice: Nothing helps your budget out more than earning more money.  So, figure out what you can do to become better and more valuable at your present job.  Then, your boss, or your customers, if you are self-employed, will have to pay you more – or someone else will.

In Summary, you can succeed financially by having a plan to do so – let’s just call that plan a ‘Budget’.  Here are the steps:

1. Set a Goal
2. See Where Your Money Is Going
3. Find ways to save
4. Live Frugally (for a Set Period of Time).
5. Pay off those Credit Cards
6. Plan Your Spending Carefully

Money Magazine’s cover story answers the question, “What to do with $1,000?”.   They give a list of 11 different things you could do with an extra $1,000. All the answers they gave have some merit, but I feel the bigger point was missed.  If you wait until you have an extra $1,000 to decide what to do with it, you will probably make the wrong choice.

I believe there are financial priorities that can apply to most everyone.  They are:

1. Emergency Cash
2. Eliminate short term, non tax deductible debt
3. Protect what you have and what you hope to someday have
4. Save for long term goals (education, retirement, etc)
5. Pay off your house.

By having a preplanned priority for your money, you will always be ready when money comes to do the most important thing with it.  As I studied finances, and thought about priorities for money, I decided that there are in fact, near-universal priorities.  For example, cash in the bank (#1) is more important than paying off your house (#5).  Paying off credit card debt is more important that saving for future college education expenses.

When creating a mortgage plan, or deciding what to do with an extra $1,000, having these priorities figured out ahead of time allow you to make better financial decisions.

If you make better financial decisions, you will have  a better chance at succeeding financially.  Decide ahead of time what the priorities are for your money to make better decisions.

Check out the presentation here to get more details on my financial priorities system.

If you find yourself in a situation where you have equity available in your house, and also have a bunch of other debts, such as credit cards or auto loans, you may consider refinancing and rolling the debts into the new mortgage.

Most people will tell you not to do a consolidation loan, but, like so many other things, “It Depends”. 

There is a right way and a wrong way to roll your credit cards or auto loans into your mortgage.  First, the wrong way – if you simply get a larger mortgage and spread out your payments on your 3 year old car for 30 years, you are probably making a mistake.  More importantly, why do you have the other debts?  Are they from a specific event or cause, such as a medical emergency, or are they a result of a lifestyle that consistently out-spent your income? If your accumulated debts are just a habit, then rolling all the debts into a new mortgage will likely leave you with a bigger mortgage and more credit card debt just 2-3 years later.  You will be worse off than if you never refinanced.  However, if you can point to a specific cause of the debts, and can show a track record of reducing those debts over the last 6-12 months, then you may be able to refinance and benefit from lower, tax-deductible interest payments rather than high interest rate credit cards.

The Right way to consolidate your debts into your mortgage:

First, know the reason the debts are there – if you can’t tell why you have the debts, then paying them off will not stop them from re-appearing.  In fact, you will go back into debt if you are in the habit of using credit cards to get by.

Second – know what your amortization schedule looks like.  From an amortization schedule you can see how long it will take for the added debts to be paid off.  The Amortization schedule will vary based on the term of the loan and the interest rate.  As an example, take a look at the table below.  This is for a $200,000 mortgage. 

You can’t control the interest rate – the market sets that, but you can control the term.  The real difference is with shorter loan terms – using a 20 year term pays off the $25,000 addition in just 3.8 years and a 15 year mortgage pays off $25,000 in only 2.5 years!

Third – Accountability.  If you are going to pay off debts and more importantly, stay out of debt, an accountability system is critical.  Usually this would be a financial planner or advisor that regularly reviews your finances with you.  Accountability can also come from an annual mortgage checkup with a mortgage planner.  When we review a client’s mortgage, we look at the credit report changes over the past year, the performance of the mortgage and the value of the house.  If debts are creeping back in, immediate changes need to be made to keep the plan on track.

Debt Consolidation Mortgage Power Play:

The absolute best way to consolidate debts into a mortgage is to use the shortest mortgage term possible.  By eliminating credit card payments or auto loan payments, the shorter term and higher payment of a 15 or 20 year mortgage suddenly becomes affordable.

In this example below, a client used a 15 year mortgage to pay off $28,000 in credit cards and car loans.  By eliminating the credit card and car loan payments, the borrower was able to use a 15 year mortgage and rapidly build equity in their house.

 Even is this borrower needed to finance a new car in a few years, the added equity in their house would exceed the new auto loan liability.  The usual outcome, however, is that once the habit if credit cards and auto loans is broken, a person finds it easier to save, so they are able to pay cash for future cars.

 So, before you listen to the pundits that tell you to never roll your debts into a mortgage, consider the effect of the amortization schedule, the loan term, and the reason the debts exist and make the best decision for yourself. 

This is another example of why I tell people to “Start with the House” to reach financial freedom.  If you have  a sound plan for consolidating debts into a new mortgage, you can build wealth and find yourself debt free faster.

If you want to boost your credit score fast – there is one best way.  Credit scores are a prediction of how likely is someone to default on an obligation.  So, if you do anything that is similar to what people did in the past prior to defaulting, it increases your risk of default and lowers your score.

To always keep a great credit score, don’t do anything that others have done prior to defaulting.  So think about that for a second – if I was going to be 90 days late on an account, what would I do 120-180 days prior to that?

I would have my credit report pulled to try and get more credit.  Then the new accounts would show up on my credit report.   I would max out my existing credit card accounts.  Lastly, I would start missing payments.

I can have my credit report pulled for any reason, I can open new accounts for any reason, and, if I was careless, could even have a late payment once in a great while and still not be in trouble.

If I max out my credit cards, however, I am either in financial trouble or I am using 0% cash advance credit card to put some money in the bank.  The Credit scoring model(www.myfico.com), however, assumes I am in trouble. 

Knowing this, there is only one way to increase your score fast – and you don’t have to pay someone to fix your score.  Keep all your credit cards at a 30% or less ratio of the amount owed versus the maximum limit.  If you have a maxed out credit card, and then pay the card down to 30% or less of the limit, you will bring your score up dramatically in 30 days or less.

The credit scoring model looks at all your cards’ limits and balances.  So, keep the total amount you could borrow high (Don’t close old accounts) and keep the amount owed low overall and on each card.