subject: The laws of money Part 1 - Financial Literacy [print this page] I overheard a hot debate this week whilst in my local pub. The nature of the debate was centred around whether a person (Jane) with savings should use them to reduce her mortgage or use them to invest with. Jane had a great salary but was worried her job may not be as secure as she had believed as little as 3 months earlier. She thought if she paid off her mortgage using cash-flow from her salary along with her savings, her future would be secure no matter what happened to her in a professional capacity.
I sat there quietly whilst heated discussion points were aired. There was lots of talk about good debt, bad debt, gearing, cash-flow, investments and security. However, there seemed to be a very important point missed from the conversation. Put simply, all cash-flow should not be treated in the same way.
Anyone who has read Rich Dad Poor Dad will understand this point instantly.
Cash-flow which is achieved as an employee is not the same as cash-flow achieved through a financially astute investment. The conversation also failed to impress the importance of buying your investments, particularly property when the market is trending downwards. This is because better deals can be achieved and cash-flow will be higher than in an upward market. Writing today, property is once again king with massive rewards to be had for the astute or well advised investor.
Cash-flow gained through increasing your assets (property investments) is a much better way of reducing your mortgage than cash-flow achieved through your salary. The obvious reason for this is we are taxed much higher on our salaries.
The conversation was strangely biased towards the fact that Jane's job was for life. Her friends were possibly being kind in suggesting her firm would never sack her or attempt to move her on. Her services were way too valuable for that to happen. They had failed to take up Jane's point that she felt insecure and were she to lose it, where would she stand? Most people never think they will lose their jobs but an increasing number have and many more will follow in the coming months. The result is if you do not own your job, you have no control over it's cash-flow.
By putting the money in to an asset (property in this case), you are in control because you own the asset. With a little due diligence and some good advice from me, Jane would have been informed enough to make a wise decision that would have paid her a cash-flow for the rest of her life.
It has been said by many that your home is a place for shelter and to raise a familynot an asset. We all love our homes but few realise they are liabilities. It is therefore nonsense to pour your savings in to your liability, especially in a declining market.
The perfect scenario for Jane would be to continuing to pay her mortgage but also to gently increase her assets as she could afford to. The assets would create cash-flow which could be used to pay her mortgage (if she wished). The key to this result is that Jane would make herself more tax efficient and she would be in control of her financial future no matter what happened in her job.
As I did not know the lady in question there was no benefit of her sitting on my table - unless of course she is reading this article?
The laws of money Part 1 - Financial Literacy
By: InvestUS.co.uk
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