Got Wealth?

“To be wealthy, you have to think wealthy. Leveraging your home equity wisely can help you to achieve that wealth.”

My girlfriend couldn’t wait to tell me what her accountant had recommended as an excellent financial strategy. “I just bought my Lexus by taking out a home equity line of credit and now I can deduct the interest on the loan!”

Hmmm! The rationale appeared to be sound on the surface. However, I didn’t want to burst my friend’s bubble by telling her this strategy had a few holes in it. First and foremost, she was elevating an auto loan into a new category called “secured.” Secured by what you ask? The asset responsible for creating this euphoria her home.

I also wanted her to understand that flexible payment terms usually result in extended repayment. You could wind up paying on that car for the next ten years! I tried to break this down gently to her because I knew my girlfriend wasn’t the only person suffering from this newfound malady called the “Wealth Effect.” Tens of thousands of people all across the land are wiping their debts clean and making all sorts of purchases based on the increase of their homes’ value. It’s turning into an epidemic, so listen up to learn how to avoid contracting the disease.

Why are intelligent, hardworking people throwing caution to the wind? Their homes have doubled in value in some cases and people feel like they finally have a leg up and can afford the finer things in life. In many urban areas, homes hadn’t appreciated in decades. When middle-income people feel wealthy, they have a propensity to spend and thus you have what economists define as the “Wealth Effect.”

However, people who already have wealth don’t spend they invest and create more wealth. Remember the saying—the rich get richer and the poor stay poor. Which is why my girlfriend needed to be thinking about how to leverage her newfound wealth not use it to create more debt. Simply put, to be wealthy you have to behave like a wealthy person.

Wealthy Move #1

Using your equity to increase the value of your existing home is a smart move. According to the National Remodeling Association the improvements most likely to increase the value of your home are bathroom and kitchen renovations. But a quick word of caution: If your neighbors don’t have granite counters, sub-zero freezers and an enclosed swimming pool, the likelihood of your getting a return on your investment are slim to none. In other words, don’t create a palace in a neighborhood of ranches and bungalows.

Wealthy Move #2

Use your equity to invest in a rental property with a positive cash flow. Positive cash flow simply means the monthly rental income is enough to pay the mortgage with a little something left over. The bottom line is you have someone else paying the mortgage and the opportunity to have the property appreciate in value. Not everyone is cut out to invest and manage property, so do your homework and find a mentor before you take the plunge. Visit your local library to find real estate investor groups in your community.

Wealthy Move #3

One young couple I know who owned their business took the equity from their home and used it as capital to expand. They purchased and financed an additional location, which had a proven track record and positive cash flow. Their research and forecasting determined they would be able to pay off the loan in five years and get a substantial return, provided they were willing to work hard. There is no doubt in my mind that they are young, gifted and headed toward early retirement.

The ability to deduct mortgage interest should be the least of your considerations when it comes to your wealth-building strategy. If your financial choice allows you to increase your net worth then you’ve got the best kind of wealth the kind that will endure and grow!

Read PDF: Got Wealth – TDJakes.com