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CrossCountry Mortgage, LLC is an FHA Approved Lending Institution and is not acting on behalf of or at the direction of HUD/FHA or the Federal government. All loans subject to underwriting approval. Certain restrictions apply. Call for details. *Certificate of Eligibility required.

4 Step Cash Flow Priority

When my clients purchase a new home or refinance their current home, it is important for me to help them analyze how they manage money and use their home equity to assist them in reaching their short and long-term financial goals. My concern is well beyond focusing solely on this transaction but rather my clients’ financial future.

The mistake most people make when getting a loan is they take a compartmentalized and short-term approach when obtaining and analyzing the mortgage, by looking at the mortgage independent of their overall financial picture. They tend to view a mortgage as a necessary evil to be eliminated as soon as possible instead of viewing it as a dynamic financial tool to be used as a strategic, integral part of their long-term financial plan.

The 4 Step Cash Flow Priority Model (as developed by Jim McQuaig) provides a guide to the direction of monthly cash in order of priority. Simply stated, as dollar bills come into the household budget (paychecks), the key to achieving true financial freedom is to determine the most effective way to allocate those dollars, in order of priority, to create the greatest financial benefit for you and your family?

Step 1: Cash Cushion (Emergency Fund)

Create a cash cushion – money on hand and readily accessible for life’s little unbudgeted emergencies. We are not talking about huge money here. For example, a family of four earning $80,000/year saving $3,000 - $5,000 in a separate “emergency fund” should be sufficient. If you are self-employed, or on commissions, that amount should be higher to account for irregular monthly income. The cash allows you to handle emergencies with cash and not fall into the habit of using credit for these purposes.

Step 2: Get Debt Free

The idea here is to eliminate all non-preferred debt. This would be all debt that isn’t your mortgage. Many individuals have developed the “buy now pay later” bad habit which has led to a strain on monthly cash flow. Even student loans, zero percent car loans or leased vehicle payments should be eliminated. The number one reason to eliminate these types of debts along with all non-mortgage debts is to gain discretionary control of monthly cash flow. A key to financial independence is to have control of where your money goes and then to conserve (save) and not consume that money.

The biggest point with step two is that personal finance is almost totally about habits. If a person has good financial habits and consistently exercises those habits over a long period of time, things will probably work out financially. However, if bad financial habits set in, this can lead to unnecessary stress on you, your marriage and your overall happiness. By developing the right financial plan now and using your mortgage as a tool to reach your goals, the habits you develop going forward can be positive ones.

Step 3 Liquidity

Here we are talking big bucks and your goal should be to save one year’s salary. Now, this doesn’t mean you have to do this right away, but when creating a long-term financial plan using your mortgage, this type of saving should be part of that plan. These are not retirement savings, but true liquidity. This is money that you can get your hands on for two primary categories of reasons – good and bad. An example of the good would be business or investment opportunities. Most of the time, when you are presented with an opportunity, there is an upfront capital/cash requirement. If you have the money, at least you have the option of taking advantage of the opportunity. An example of the bad reasons would be major interruptions of your income which includes health issues, job layoffs or any economic downturn that is outside of your control. By the way, the number one cause of home foreclosure is disability.

You can see that if you had no debt outside of your home mortgage and one-year’s salary in a liquid, safe diversified place you would have gone a long way toward reducing or eliminating the financial stress in your life. You would also have choices that most other people will never have. You will be able to make decisions, both major and minor, without having finances as your number one consideration. Where would you work or live if money wasn’t a factor? What would you do with your time? How would your relationship with your spouse change?

Step 4: Pay Off Your House

Here’s where it really begins to get fun. Most people dream of paying off their home. For many, this is a far-away dream. It seems that more and more people are starting to doubt they will ever be able to have a mortgage-burning party. Most also would define “having their home paid off” as not having a mortgage. That of course, is only one way to look at it. Wouldn’t it also be true, however, if you had a $400,000 mortgage and you also had $400,000 in a side account, from a balance sheet perspective, you’d have your home paid off. (For more info I can get you “Utilizing your home to Create Wealth”)

There are three things to address when discussing “paying off your house”

1) down payment 2) principal payments 3) and home equity. In the Four-Step Cash Flow Priority Model above, we said that monthly cash flow should first go to developing a cushion then to paying off all non-preferred debt, followed by liquidity/savings and finally to paying off the house.

With that in mind, one has to consider whether it is more practical to make a down payment when buying a home or getting a loan that requires principal payments? Similarly, when you refinance, one should consider whether it makes sense to leave equity in the property if you have other debts or lack liquidity. The key to understanding and implementing this concept is CONSERVE not CONSUME home equity!

The effective management of home equity along with consistent long-term financial discipline can be the key to financial independence but it can also spell disaster without a plan. The best way to ensure the success of this is to meet with your financial advisor who can assist with the developing, implementing and monitoring of that plan. If you would like to arrange for a free consultation with a top-notch financial planner, let me know and I will introduce you to someone who could help change your life.

If you have any questions regarding this article or would like assistance in creating a Mortgage Plan customized for you, please contact me at jpalermo@myccmortgage.com or call 978-548-4467 or visit www.JeffPalermo.com

CrossCountry Mortgage, LLC
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Office:  (978) 548-4467
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