As a CPA, I have categorized home-owner’s financial strategy into two categories over the last 32 years: One, the Depression Victim, and Two, the Leverage Junkie. The Depression Victim’s financial strategy is a person who has lived or heard about people living during the Great Depression of the 1930s. My mother is like that. The philosophy goes like this. You buy a house, and you pay it off, period…Sure, you can buy rental real estate, but don’t use your house as a piggy bank.
The other financial strategy extreme is the leverage junkie. Looking at them through my CPA glasses, I see that a person who holds that philosophy will buy a house, and then when it goes up in value, borrow against it to buy an other.
As you probably guessed, many people that lived by the second philosophy felt our latest economic downturn. Conversely, those that stuck by the first philosophy fared better.
But what if you take a middle road? You refinance a current mortgage? Jilian Mincer’s article, When Refinancing Doesn’t Make Sense looks at this financial strategy. CPA’s normally look at these topics from a very narrow point of view, but I act more as a financial strategist than a CPA to my clients, at times. For example, the authors state that to refinance at a low rate and accelerate your payments may be wrong, because you can earn 7% with the same money that you are saving 4.5% in mortgage payments. Really? In today’s volatile economy where States are going broke and the feds can’t control income, where are you going to find a stable 7% return with very little risk? My CPA clients that have this financial strategy mindset will not risk their money to that extent.
Now there is an exception to this point of view. I always suggest that my CPA clients save a few of months of liquid assets. It could be in savings, bonds, even precious metals, but something that you can tap into in an emergency. Why is this important? If you contact a serious illness, suffer an injury, or get laid off, you have a cushion to make a few months of rent or mortgage payments while you decide your next move.
I find that my position as a CPA gives me a very good view point at business and personal finances. The best advice I can give is to balance your thinking and prepare for economic downturns.