The Priority System of Money

I have had the privilege and opportunity of working with numerous First Time Home Byers (FTHB) and I have always enjoyed the experience. There is generally a little more education required - that's a big part of the reason I enjoy it. Beyond the necessary home and mortgage questions, I spend a fair amount of time talking about money and general finances with my FTHB clients. I do not give specific investment advice as I am not a licensed financial planner, but I am more than equipped to introduce general strategies (I have a finance and marketing degree from Cedarville University). Once these strategies have been introduced, I happily refer my clients to a financial planner to help them continue developing the plan as well as assist with implementation.

Regardless of a client's income or background, there is a general road map that will help ensure financial success for those that follow it. It is a plan I have adopted and adapted from other mortgage and financial professionals and has proved to be extremely flexible to a client's unique situation. Obviously this is a general plan and my recommendations will vary depending on your situation. If you would like a customized mortgage solution, please don't hesitate to contact me ([email protected]). There are four general principles and we'll take a look at each one.

1. Establish an Emergency Fund - The first thing I recommend to clients is to get in the habit of relying on yourself rather than a credit card to get you out of a financial jam. These things come at every single one of us whether we like it or not - a new water heater, tires on the car, etc. Everyone should have a minimum of three months worth of income in a completely liquid fund (savings account) that you could access today if you needed it. If you are self-employed, paid largely by commission or bonus, or have an irregular income source you may want to have as much as six months worth of income set aside. This is strictly rainy-day money and is there to keep you out of the jaws of the 18%+ credit card monster.

2. No Debt Other than Mortgage - Once a client has put away their rainy day fund, the next step is to eliminate all non-preferred debt. This debt will be anything other than your tax-deductible mortgage. Typically credit cards should be paid off first, then auto loans, and lastly student loans. Often I'm asked whether this should be the first step instead of the second. These two steps could certainly be switched but the concern is usually a discipline issue. Some people are quite capable of paying off their bills and then committing to the savings plan. Other people freely admit that it will be a challenge. This is when we would recommend saving first (to develop the habit) and then focusing on paying down the debt. I want to help set my clients up for success and generally speaking we have a better chance if we start by saving the emergency fund first.

3. Build a Source of Liquidity - This fund will again be different for every person but it is typically equivalent to six to twelve months worth of your income. This is an ultra-critical part of the plan as these funds will allow us to deal with both good and bad opportunities. A bad opportunity is unfortunately all too easy to describe. Things such as job loss, extended leave from work (for your illness or a family member), disability, and natural disasters are all things that people face. I don't know about you, but I would much rather be prepared and have access in the event my wife or one of my daughters became ill and I needed to take some time off from work to help out. Without this fund a person would need to make some difficult choices.

Good opportunities can be more difficult to quantify. These opportunities can appear in the form of having the ability to start your own business, invest in a business with a friend or relative (that probably sounds more like a nightmare for most people!), buy a second home or investment property, or anything else that comes along. These are opportunities you would not even have a choice to make if you didn't have the funds available. Opportunity cost can be a very painful thing if you haven't experienced it before.

4. No Mortgage on Your Balance Sheet - Please notice I didn't say NO MORTGAGE. The goal is to have an asset account (401K, Roth IRA, taxable stock portfolio, etc) that equals or exceeds your mortgage balance. Once you have completed the first three steps, the additional money you have been putting away and/or paying towards debt can now be allocated towards this goal. This is generally the method that provides the greatest amount of safety, liquidity, and rate of return while giving you incredible flexibility and allowing you to have the capability of paying your mortgage off early. I will give you an example in a later post that shows the incredible power of leverage and arbitrage you command with your mortgage.

There is certainly no one size fits all approach, but this is a very good set of guidelines that will help a majority of people accomplish their financial dreams and goals. If you have any comments, constructive criticism, or general feedback, I would love to hear it!

Comments

[Josh]

Who is that handsome guy pictured at the top of your blog?

[Tim Abbott]

I had very limited resources so he is the best looking model I could afford to hire! Thanks for stopping by.

[Thomas Zoellner]

The monthly payments for 30 year or 15 year fixed mortgages are the main considerations for many people who are looking to buy a home. No-one wants a mortgage hanging around their neck forever but with home buyers entering the market later, an early repayment of this loan is important. However, before you rush in and sign any papers, there are points to contemplate. One point to remember is ensuring that your monthly mortgage repayment remains the same throughout the entire period of the loan.

[Margaret]

I also work for first time home buyers and I hope yours experiences and ideas will help me a lot.
Thanks for sharing them here.