Debt to Wealth - John Cummata on The Building Blocks to Wealth
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The Building Blocks to Wealth - John Cummuta
The very first step you'll want to take after becoming debt-free is to set up an emergency fund. Why should you be debt-free before setting up such a fund?
The answer lies in the math. Most financial professionals recommend an emergency fund equal to six times your monthly cash flow requirements, so you can go six months without working and still pay all your obligations. Your living expenses with debt are greater than they will be when you are debt-free, so you'd need a larger emergency fund if you start while in debt. To compound the problem, the amount of extra cash you have each month is smaller when you're in debt than when your debts are gone. So, if you have to save up a large amount of money using a small amount of cash each month, it will take a long time to gather your emergency fund. Therefore, it is better to pay-off debts first, then set-up an emergency fund.
The second step to building wealth is a solid understanding of an asset vs. a liability from an investor's perspective. It is different from a banker's perspective. For example, your car is a liability because even if you own it outright, it will not appreciate in value-whereas a banker would consider a fully owned vehicle an asset. Your student loans are liabilities because, even though you used them to get an education that may bring you more income, the money for the loan is benefiting the lender. Your children, while a great source of joy in your life, are probably liabilities as well.
Your antique doll collection, your gold coin collection, and your diamond engagement ring may also be assets. However these kinds of "hard assets" are not the best investment choice because they typically hold their value instead of increasing their value. Your home-based business, if it is operating a profit, is an asset. Your life insurance policy, although it becomes income when you're dead, is a liability when you're alive because it creates negative cash flow. Your home is yet another liability because it too causes negative cash flow. However, real Estate can be an asset in your portfolio if it is investment real estate that you rent out, or if you are investing in Real Estate Investment Trusts (REITs).
And finally, focus on spending your money on assets, or investments versus liabilities. Investing means - regularly putting your money into good securities and letting it appreciate over time. The best tool to guarantee the regularity of your investing is called Dollar Cost Averaging. Not only does it provide consistency for your investment program, but it actually aids in your assets' appreciation. Dollar Cost Averaging is when an investor takes a set amount and invests it regularly; usually monthly. And these investments are made regardless of whether the market is up or down when the investments are made. This is the opposite of a market-timing strategy. You're not trying to time your investments to "buy low." You're buying consistently, whether security prices are low or high. But this systematic approach actually uses the market's up and down movement to increase the value of your investments.
Learn more strategies from John Cummuta from Transforming Debt into Wealth
The very first step you'll want to take after becoming debt-free is to set up an emergency fund. Why should you be debt-free before setting up such a fund?
The answer lies in the math. Most financial professionals recommend an emergency fund equal to six times your monthly cash flow requirements, so you can go six months without working and still pay all your obligations. Your living expenses with debt are greater than they will be when you are debt-free, so you'd need a larger emergency fund if you start while in debt. To compound the problem, the amount of extra cash you have each month is smaller when you're in debt than when your debts are gone. So, if you have to save up a large amount of money using a small amount of cash each month, it will take a long time to gather your emergency fund. Therefore, it is better to pay-off debts first, then set-up an emergency fund.
The second step to building wealth is a solid understanding of an asset vs. a liability from an investor's perspective. It is different from a banker's perspective. For example, your car is a liability because even if you own it outright, it will not appreciate in value-whereas a banker would consider a fully owned vehicle an asset. Your student loans are liabilities because, even though you used them to get an education that may bring you more income, the money for the loan is benefiting the lender. Your children, while a great source of joy in your life, are probably liabilities as well.
Your antique doll collection, your gold coin collection, and your diamond engagement ring may also be assets. However these kinds of "hard assets" are not the best investment choice because they typically hold their value instead of increasing their value. Your home-based business, if it is operating a profit, is an asset. Your life insurance policy, although it becomes income when you're dead, is a liability when you're alive because it creates negative cash flow. Your home is yet another liability because it too causes negative cash flow. However, real Estate can be an asset in your portfolio if it is investment real estate that you rent out, or if you are investing in Real Estate Investment Trusts (REITs).
And finally, focus on spending your money on assets, or investments versus liabilities. Investing means - regularly putting your money into good securities and letting it appreciate over time. The best tool to guarantee the regularity of your investing is called Dollar Cost Averaging. Not only does it provide consistency for your investment program, but it actually aids in your assets' appreciation. Dollar Cost Averaging is when an investor takes a set amount and invests it regularly; usually monthly. And these investments are made regardless of whether the market is up or down when the investments are made. This is the opposite of a market-timing strategy. You're not trying to time your investments to "buy low." You're buying consistently, whether security prices are low or high. But this systematic approach actually uses the market's up and down movement to increase the value of your investments.
Learn more strategies from John Cummuta from Transforming Debt into Wealth
