Once You’re Debt Free…

I was super excited for a couple that someone met and asked to contact me. He told them to get in touch with me for some feedback on whether to use investment money to pay off their mortgage, or keep investing. That wasn’t the exciting part, though. Debt free but the home is something most people haven’t ever experienced in their life. If your home is also paid off, you’ve reached the pinnacle of financial success. But the critical hurdle is to have all the consumer debt cleared first.

This couple, at $780,000 actually become part of the richest one percent in the world. That includes your toys, cars, and equity of your home. Net worth is the total of what you OWN less the total of what you OWE. If you’re someone in that position, there are a few general things you should consider:

Close any line of credit you have. That’s especially true if it’s secured against your home. Once you have some net worth – stop borrowing forever. Don’t be tempted to just keep that line of credit in case…close it today.

Have one normal second credit card, but get an American Express card right from them with no monthly payments. A real charge card forces you to pay the balance in full every month. Close every other card but these two.

What’s you big reward for having won with money now? Maybe it’s a new vehicle every five years, perhaps it’s travelling, or now doing a ton of charitable giving. Set up a separate savings account and have money transferred into it automatically every month. $500, $800, or whatever accumulates automatically and pretty quickly to fund your well-earned big rewards.

Make sure your investments are conservative if you’re into your 50s or older. But do make sure they grow, and aren’t parked at a bank with really bad returns. Whether it’s $200,000 or $2 million – conservative investments should still yield you over seven percent a year before taxes! That will double what you have in the coming eight to 10 years!

If your investments do, or will, include rental property, make sure it’s with 50% down. Pay it down if you have one or have the 50% down if you buy one. Do not make a rental property the reason your finances crash. The risk isn’t worth the income. 50% down lets you sell it in a week no matter what the economy does.

Set up a full emergency account. Most people struggle with the first step of one week’s pay to get started. If you’re financially successful, set up a savings account with three to six months of all your expenses. That way you’re not breaking investments, cashing RRSPs, or using a line of credit in an emergency. If you need big car repairs or a new roof, it’s no longer an emergency, but only an inconvenience.

If you still have a mortgage, it’s time to get serious about paying it down or paying it off. You may just want to write a cheque for the balance and then re-direct what you were paying a month back into your investments. Plan B would be to pay 10% extra each year, cut the leftover term down, and change to weekly payments to cut another four to five years off the time left. You have the money – now just increase what goes on the mortgage.

Lastly, pay it forward. Make sure the kids of friends, your nieces, nephews, grandkids, or families in your church or elsewhere get to learn the lessons you know AND that you live: Put some money into savings each month, live on less than you earn, and learn the difference between needs and wants. Oh and if you care enough to share: Got to Mosaic and get someone a copy of the It’s Your Money book. They may not listen to you but maybe they’ll read a chapter or two…

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