Source: Zillow.com
I just saw a short video that rang true with me. It was not on YouTube, and I am no Tech Wizard, so the best I can do to share it with you is to link to it here.
The speaker asked the question, “What’s this housing crisis caused by?”
And the answers came, as many of us would list off – there are too many foreclosures, or housing prices are dropping too much, etc.
His answer was, “There was a liquidity crisis”. If more homeowners were savers, and had some six months expenses saved in the bank, then with all the job losses that we have seen and other things hitting homeowners, many more of them would have had the staying power to keep paying their mortgages until the ship was righted.
And that struck a cord with me, because I have been councelling homeowners for years to follow the Four Step Priority of Cash Flow as they get into their home. And that is very simple.
- Have a Rainy Day fund: At least 3 months expenses in a very liquid form, 6 months if you are the only provider for the household.
- Pay Off all non-preferred debt: meaning, anything that does not carry with it a tax deduction, including credit cards, car loans, student loans, etc. Pretty much anything but the house for most folks.
- Save significant reserves: Equal to or greater than one year’s income. Invest this and do all the great things with it that a financial planner would recommend, but have it. Why? Because good things happen; and because bad things happen. If you have the cash, you will be ready to act of the good things and invest at the right time; and you will be ready to deal with the bad things life throws at you by making prudent decisions, without money dictating your decision for you.
- Then, go ahead and pay off the house, and invite all your friends over to burn the mortgage note.
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