27 Apr Be an Effective Partner with Your Financial Advisor and Safely Use Your Line of Credit Aka: Bringing Your Future to the Present Part 1 of 2
In a previous post, I cited a Huffington Post article outlining the dire financial situation that many households are facing. The statistics are grim: 75 percent of American’s have less than six months living expenses and almost two thirds of Americans are considered financially illiterate.
We Must Become Partners with our Financial Advisors
Financial institutions and financial advisors are not paid to educate people. They are paid to invest dollars. This means we need to take the time and take learn the basics about managing our finances. Yes, there are lots of options; however, the options are based on some simple fundamentals.
It really is easier than you think! Let me show you just how easy it can be.
We’ll make the following assumptions:
- You deposit $5,025 in the bank each month,
- Your monthly expenses total $4,025 (This includes your mortgage payment of $1,364.40) and you have $9,000 in savings.
- You’ll receive a 2 percent pay raise every year
- You have a $15,000 line of credit that charges an interest rate of 4.5 percent, and you find an investment advisor that enables you to earn 6 percent on your savings.
Using a Line of Credit to Put Your Dollars to Work
If you were to use a line of credit and put your money to work, let’s examine the possibilities.
If, after you’ve paid all your bills (I call this positive cash flow), you consistently saved 30 percent of your cash (The first year this is $300 each month) and saved 30 percent of each year’s salary raise, your mortgage will be paid off in 11 years, and in fifteen years you will have a savings balance totaling $196,487. How does this scenario make you feel?
By the way, 70 percent of your positive cash flow went to paying off your mortgage. By paying your mortgage off early, you’ve saved $121,658 in interest.
In the first year, your monthly salary increase is $100. You’ve agreed to save just $30. It doesn’t seem like much. Let’s see the impact that this seemingly small decision will have on your financial health.
Let’s make one small change in our assumption. Let’s see what happens if you spend the $30.
If over the next few years, you spend all of your salary increase, your mortgage will be paid in full in a little over twelve years and in fifteen year you will have saved $127,749. It will take you almost 18 months longer to pay off your mortgage and you’ve given up almost $70,000 in savings. The additional time taken to pay off your mortgage has cost you almost $8,000!
Small changes create big results! This is the power of compounding.
We created a scenario and immediately saw the results, and I’ve designed an easy to use finance application you can use to create your own financial plans. CashMap gives you the power to create your personalized scenario and immediately see the results. To learn more, read about the CashMap app on this site or visit CashMap’s app page on Apple’s App Store or Google Play.
I’d love to hear from you with your financial questions and concerns. Email me your questions or suggested topics to email@example.com. Learn more about CashMap at www.cashmapapp.com , and follow me on Twitter (@Cash_Map).