Wednesday, January 31, 2007

House or Portfolio?

I am writing today to give my perspective on the question that is constantly asked of financial consultants.

Q: Should I pay off my house or save the money and invest it?

A: Build up your portfolio

There are many circumstances that will alter my advise here, however it is up to you to decide what will be best for you. I have ran the numbers several times and unless you have a mortage in the 12% and up range (get a new loan) you will be more financialy free building up your protfolio. You can pay a little bit more towards your mortgage, like an extra payment a year. However putting the money into your investments will grow to a much larger amount as you approach retirement. I always ask people to do some homework and look at the increasing costs they will incure post retirement and the rate at which they are increasing. Example, I work with a gentlemen who is 61 years old and was just quoted $1,700 a month for health care coverage for him and his wife. That is for the same health care that his company provided for $95.00 a month. A free and clear home will not help if you get laid off, downsized or have to pay your own health care.

So my question to you is, do you have the kind of home that will pay that monthly premium? The answer is, no-one does. Why pay off your home when you don' t have substantial liquid assets yet (unless you do, then this article is not for you). Many people don't like having mortgage debt so they think they should pay it off right away. If you don't like the debt, don't take it on in the first place. Rent until you have enough to pay cash. Once you have enough, your principle's interest will pay the mortgage anyway. That is the beauty of this strategy. Then once the mortgage is paid off you still have income coming in. All you will have is a paid off house and hopefully some retirement income if you follow the prevailing wisdom and pay off your home so that you feel more secure.

Take the time to do some research and see the costs for folks currently retiring and what you should expect when you retire. The last thing you want to do is have to sell your home to move into your childs basement or guest room. Believe me it happens!

Tuesday, January 23, 2007

Cash Flow MGMT: Debt Repayment

Cash Flow is King!

Most folks I have worked with have never learned about cash flow and how important it is to your financial position. Whether you are building wealth or just living day to day. It is the blood of the financial body.

Today I am writing to those who have been struggling with debt repayment.

For the many years that I have been giving my clients financial advise I have been showing them a strategy for paying off debt that I developed when I was starting out. I read or heard that the best way to pay pay off debt is to start with the highest interest rate debt and work down from that. What if you lose your primary source of income however? Then how do you pay your $400.00 car payment. I can always come up with the $15.00 or $50.00 to pay the credit card minimum, but I will lose my car if I don't pay that note. So I started thinking about my situation and if the prevailing debt repayment wisdom made sense for me. I came to the conclusion that it did not.

The pay your highest interest first mantra makes sense if you have only credit card debt. If however, you have many debts such as student loans, car loans, personal loans and credit card loans, then it makes more sense to take a different road. Being financially free has to do with being in control of your financial position. If you lose you earned source of income, what will you do? So, start with the largest monthly debt requirement (i.e. a car payment). pay off that debt and then work your way down. If your credit card debt is much larger than the rest of your debts, then email me and I will be more than happy to discuss a strategy tailored to your situation.
Monthly Income = $1,000
Car Payment = $400 + 760
Student Loan = $200
Credit Cards = $160
Month End = $0.00
Take the burden of the largest monthly requirements off your shoulders as soon as you can. This frees up your cash flow giving you more control. If you get yourself into financial strain you can better handle the smaller payments even if you are building up more interest. At least you can get yourself in a position where you are able to meet your monthly obligations, which is much better than defaulting on any of them. If you have a substantial amount of high interest debt (much more than any other debt) you maybe better off getting that down to a more manageable level. However if you have substantial high interest debt, then it may be your largest monthly payment anyway.
I developed this strategy when I got out of college because I wanted to feel more in control of my current and future financial position. My thinking during that time was that when I have the big monthly requirements knocked out, I will be closer to financial freedom. No matter what, I can pay the minimum on the smaller stuff. Then one day it was all paid off. That is where you want to be-that is real financial freedom. There are of course more aspect to financial freedom and I will write about them in time.

Have a productive day,

Jake Blake

Friday, January 19, 2007

Friday Planning

Today I would like to write a little about planning. When buildling their budgets for the day, month and or year, most people fail to do what I believe is most important in the process. What works for me is planning out the whole year month by month. It is no excuse to forget about an upcoming bill. You should be aware of all expenses at all times. Also, you can come up with all the reasons in the world why you couldn't stick with a plan/budget, however at the end of they day the question is did you achieve financial success or not. Nobody cares why you missed the mark. You have to be tough and taking a passive approach to planning is bogus. If want to be serious about accumulating wealth, then you must approach it seriously. Those who come up with all these strategies to "stick with you plans" never make it. I have seen it a million times. The only way is to GET SERIOUS and do it. There is no excuse good enough to stop you from reaching your goals. There are too many examples of people before you who have achieved so much more while having started with so much less. They too had bad luck looming over them it seemed, then they took charge of their own lives and meraculously the bad luck dissappeared. So take out a pen and some paper (or in my case an excel file) and start building.

Now if you are going to get serious then this is what I do and I grow my net worth each and every month by more than most people save in years. I started with the dates of each bill due and then added the dates of all sources of income. This allows me to see what is coming in and what will go out everyday, month and for the entire year. If you build it on excel it is easy to make changes as things come up. Using a checkbook balancing system is not good enough. All that does is tell you how much you have or need in your account. It doesn't show you what will happen two or three weeks down the road if you spend an additional $50.00 on dinner when you only have $50.00 in your budget for that dinner. Build a template that has your monthly budgeted amounts built into it like (
My method is no different from what every successful bussiness does (obviously with some variation) and if you run your household like a successful business, you will become wealthy.
Start with that and I will add more about what I do in time.

Have a productive day,

Jake Blake