By Gary Silverman, CFP?
Banks make investments. Some of these investments are loans, and some of these loans are mortgages. Does a mortgage not sound like an investment? Well, it is if you are the bank.
How it works is simple. The bank invests money by making a loan to the person buying the house. In exchange, each month the borrower makes payments to this loan. In the beginning, most all of the payment is interest, but a tiny fraction is a partial pay down of the amount owed. Over time, more and more of the payment is paid down and less is allocated to the interest until, at the end of the mortgage period, payments cease and the loan is paid off.
When a real bank holds a mortgage, they know that the payments will eventually stop. They use part of the cash flow from it to operate the business and to pay the owners a profit. But a good portion of the payments are put aside to reinvest. They make more loans, buy investments, or expand their services?all of which provide for even more future cash flow.
When individuals instead of banks invest in mortgages, they often forget how this cash flow works. When the mortgage is paid off, the payment cessation takes them by surprise. After all, they may have been earning from this investment for decades. They got used to the regular payment coming in the mail. They forget that part of this cash flow was a portion of the original amount they loaned out. Because of this they might not have a plan for the day when the payments end.
For the Bank of You, your career is like this mortgage. You invest in yourself through the gaining of skills and knowledge. You turn this into a career just as you turn cash money into a mortgage investment. Your career becomes an asset. Over time, you ?monetize? your career asset?in other words, you turn your career into cash. You work and get a paycheck. You get used to that paycheck every month. Your lifestyle is built around that steady stream of income.
When that stream is cut off, a lot of folks find they don?t have a plan to keep living without it. As president of the Bank of You, steps should be taken to take some of each payment aside to reinvest it in some other investment. That way, once the steady mortgage is paid off, you still have other investments to live on.
Turn your career?this mortgage investment so crucial to the Bank of You?into assets that work for you. You can use part of your paycheck to run your business: pay taxes, fix the house, and pay utilities. You can use part of your paycheck for profit: that?s the fun stuff like vacations and spoiling the grandkids. You can also put a portion aside to reinvest.
Some of that investment will be in you. You?ll spend time and money becoming better at what you do. Some of that investment will be more diversified. Maybe you?ll own a rental home. Maybe you?ll invest in stocks or bonds. Maybe you?ll start a business on the side. No matter how it is done, it will be a way to multiply your original asset.
The important thing isn?t what you reinvest in (not that it?s unimportant), but that you reinvest. It is the only way to maintain a cash flow once your career asset is depleted.
Gary Silverman holds the Certified Financial Planner (CFP?) license and is a member of the Financial Planning Association (FPA?). Gary is the founder of Personal Money Planning, a retirement planning and investment advisory firm, and is a Qualified Kingdom Advisor.
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Views expressed are the personal views of the author, and do not represent the views of the National Foundation for Credit Counseling, its employees, its members, or its clients.