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Strategy 5: Optimizing your liquidity to protect the principal of your greatest asset and add a safety net to manage financial emergencies
There are two proven paths to building wealth
1. You can increase the amount of money you make, or
2. You can increase the amount of money you keep.
Markets and economies cycle up and down and when they do large amounts of wealth can be erased as savings dry up. The Self Banking concept of liquidity optimization offers both individuals and businesses an opportunity to protect the principal and have more cash available for emergencies or job loss.
Liquidity refers to the total amount of cash and cash equivalents this also includes lines of credit where you have access to equity. Your home is a great source of liquidity and, when managed correctly, can protect you from losing tens of thousands of dollars in value in the event your home is in a declining market.
For example, a home worth $200,000 with a mortgage of $160,000 gives you access to $20,000 of liquidity. A balance of $120,000 would give you access to $60,000 of liquidity. The loan vehicle used to access that liquidity is home equity line of credit. If you lose your job or have a financial emergency you could use this liquidity to sustain yourself with very minimal costs. This could prevent the loss of your home, charging up credit cards to pay for basic items, and depletion of savings and investment accounts.
In the last three years, many Americans have lost tens of thousands of dollars of value in their home. Much of this loss was principal paid to the bank that they will never get back. With the right debt structure one could separate this principal from the bank before any loss of home value occurred. For example, you purchased your home in 2000 for $150,000. By the middle of 2006 your home value was estimated at $300,000. When you purchased your home the debt was structured as a first lien line of credit. Each year your value increased you had your bank increase the limit of your credit line. Then in 2007, markets started to reverse. Your credit line limit was now $260,000 and you owed only $75,000. Noticing the market reversal one could at this time separate almost $200,000 of equity and place it in a side account earning interest while being fully liquid. Or, leave that money trapped in the house and watch it disappear.
With the proper advice and the right strategy optimizing liquidity will make you safer and give you piece of mind during times of financial instability. You can take the necessary steps to implement self banking strategies to defeat debt, enrich your life and become bigger givers. Visit www.faithandyourfinances.com or call me at 727-502-7157 for a free holistic analysis.