5 Steps to Creating Financial Security

As a mortgage professional, I get to review detailed financials when someone is looking to buy or refinance a home via their loan application. Sometimes people are using every cent they can or are maxing out their monthly cash flow in order to have a home. I often have people who come to me because they need help restructuring their high-interest credit card debts. And I also help people who are well established. Personally, I would like to see more people on a path to financial security.

Here are a few suggestions for your consideration… not necessarily in this exact order and your plan may vary depending on your financial situation or goals.

  1. Have an emergency fund. It’s so important to have funds available in the event of an emergency. No one ever expects a health issue or loss of income. Work towards having at least 3 months of what it cost for you and your household to live. If you have 3 months of savings, perhaps consider building it to 6 months of assessable funds.
  2. Buy a home. Owning a home typically builds wealth overtime. People who own homes pay towards their home equity every time they make a mortgage payment and they have the opportunity to have their home appreciate in value. Your first home may not be your “dream home” but it may very will help you to be able to buy your next “move-up” home.
  3. Max out your 401k and IRAs. Please please please take advantage of any contributions or matching your employer may offer. If you don’t feel like you can afford to take part in a retirement plan, consider contributing at least a minimum amount and try increasing the amount each year. NOTE: if you are planning on buying a home, you may be able to borrow against your 401k and pay yourself back! Check with your plan administrator for more details.
  4. Eliminate revolving debt. The money wasted on credit card interest is astounding. If you haven’t done so in a while, pull out your credit card statements and check out the interest rate and how much interest you’re paying.
  5. Invest in the stock market. In my opinion, investing in the stock market should be done after you’ve eliminated high interest rate debts and are on track for funding your 401k/IRAs.

If you are considering buying a home or getting a mortgage, this plan may need to be adjusted. For example, I recently had clients who were going to use all their funds towards a down payment to have a lower monthly mortgage payment. After reviewing their finances, they would have more cash flow and being paying less interest if they paid off their debts and put less money down towards the home. We also waited to pay off the debt until closing so that the closed accounts wouldn’t hurt their credit scores. Again, this was just their personal scenario – it may not be the best path for someone else. And, if you are contemplating buying a home, it may make more sense to delay or reduce funding your 401k if you need those funds to meet minimum down payment requirements (NOTE: you don’t need 20% down to buy a home). This is why it’s critical to meet with a mortgage professional who can review your options with you to help you create a game plan – even it you’re a year or two away from buying a home.

Of course, if you’re thinking about buying a home, I would love to help you create a game plan! Please contact me for more information.

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