#FinLit Mondays. Your income from employment is like the water and electricity that come into your house. Disaster or the whim of the company can get those turned off. Your financial house must be built upon more than just that income.
The challenge is knowing the most sustainable place to start. With limited resources, many feel confined to simply maintain their current position. But, an updated money mindset, along with some sound lifestyle adjustments can move you from financial apartment dweller to financial home owner in relative quickness.
Importance of Home Ownership
Having a home sets up a pattern of ownership and community responsibility in a way that no other asset ownership can. You begin to see your property as part of a whole, impacted by its surrounding properties. You begin to care about tax rates and insurance policies. You start to recognize how small problems gone unchecked become expensive repairs.
That’s why home building as an analogy fits for your financial health. Your money isn’t just your money absent other influences. You see how credit scores, interest rates, and payroll tax impacts your bottom line. You consider how your creeping cellphone or cable bill will eventually throw your budget out of whack.
Many want to gain wealth all at once. My grandmother lived each day hoping to “hit the lottery.” Truth is, wealth creation is a much longer process. It usually takes a generation to create wealth. More importantly, without a culture (a home) built to sustain the wealth, it can be gone in less than the time it took to accumulate it.
Even when you think you are doing the “right” thing and investing, your financial foundation may not be suitable make that investment. You end up with less than you started with. Here is the financial home analogy expanded to support sustainable building of you financial health and a foundation for generational wealth creation.
A complete budget that extends Over 12 months, list income and expense projections, and is updated with actual income and expenditures each month is the bedrock of wealth creation. In order to intentionally target your money, you must be able to plan into the future. Your ability to see generations ahead begin with seeing weeks beyond your current position.
First Floor: Debt-Income Ratio and Credit
You may not realize how closely these two are related, but they are in sync. You must have debt in order to have credit. But, you must maintain less than 30% utilization of your available credit in order to be perceived as an acceptable risk to new creditors. A number of other factors are included pulled directly from your credit report even before your income is assessed. That makes your credit report of utmost importance to stability in your home.
Second Floor: Residual Income
You may think that an important key to investment readiness and wealth creation is disposable income–income beyond what you use for bill payment. Even more important is residual income–income that continues without requiring more work from you.
Before you invest outside your home, you are wise to invest in the creation of residual revenue streams. Many scholars and advisers suggest that you create at least 7 revenue streams. I suggest that 5 or more of these be residual.
Investing outside your financial home is perfect for the analogy of the attic. It’s a place you will not visit much. They are typically long-term commitments. You are looking for continued growth over time, and a return periodically. The mental shift required at this level is one from “making money” to one of “creating wealth.” That means that the investment is not for you to use. You leverage it for your children’s children to use. The goal, though, is that the mindset is passed down with the assets, and your grandchildren practice the lessons of financial leverage to the increase of the family fortune.
Be like the one homeowner that invests in her neighborhood, then expands to her side of town, and next builds a community development. Your wealth extends based on a solid foundation, mindset, and strategy. With this first home, you can impact the world.