In Part I of this article, I mentioned that weve all been taught by our parents, grandparents and conventional wisdom that we should pay off our home mortgage in order to own our home free and clear so that the bank can never take our home from us. I explained why that thinking is outdated. In this article, Im going to present some ideas on using mortgages as a tool to increase wealth.

I want to say up front that Im not advising you to go out and do the things Im talking about without first getting educated as well as consulting with a trained and licensed professional. While I firmly believe that what Im going to tell you is a great strategy for increasing wealth, theres also no one strategy that is right for every person since we all have different goals which require different plans of action. Also, it would be very easy for a dishonest or unskilled financial advisor (loan officer, CPA, financial planner, etc.) to take advantage of you or mistakenly put you into a product that costs you time and money instead of helping you to become financially independent.

Before we start talking about liberating your equity and investing, lets make sure you have your financial house in order. It wont do any good to take equity out of your house to start investing if youre burdened by a massive debt load and forced to use your credit cards every time an emergency comes up. I recommend a three-step model to my clients that conservatively builds a solid financial foundation before leveraging equity to increase net worth. This three-step model has the following parts, in order of priority: develop a cushion, get rid of bad debt and create and maintain liquidity.

I believe its absolutely essential for everyone to have a small cushion in a savings account to cover lifes little emergencies and make sure they dont automatically reach for a credit card or borrow money. Were not talking about a lot of money here usually around half of a familys monthly income. If the familys combined income is $8,000 a month then $4,000 should cover it. If the income is commission-based or somewhat irregular, its a good idea to increase the cushion to a months income.

Next, get rid of all bad debts debts without tax advantages which means everything except the mortgage and maybe student loans (car payments, credit card debt, etc.). These should be paid off before moving on to the next step. If youre investing in the market instead of paying down a credit card thats charging you 20% interest, then you would have to make over 20% on your investment in order to come out ahead! Youre much better off eliminating the credit card debt first so that you can invest your extra cash flow. This can be accomplished by using the equity in the home, but there are also different methods to pay it down month by month. My favorite is the snowball method, which involves making the minimum payments on all debt while paying as much as possible each month toward the debt with the highest interest rate. Once that debt is paid off, keep paying the same amount each month but pay the extra toward the next-highest interest rate. Youll be free of bad debts before you know it and will have the little rewards of paying off debts along the way to keep you motivated and focused on your ultimate goals.

The final step before beginning to invest is creating and maintaining liquidity. I advise you to have six months salary in a safe, liquid place such as a certificate of deposit, money market fund or other conservative liquid investments. This allows you to be prepared and have cash available for things like business opportunities, helping out friends in need or taking some time off for a vacation. It might be needed for extenuating circumstances like a job loss, health issues or major unexpected expenses. You will have a significant safety net and will sleep better at night!

After these three steps are accomplished we can then consider investing. Depending on your financial goals and tolerance for risk, I advise looking at a mix of stocks, bonds and real estate. You should always take some time to educate yourself before jumping into any type of investments. There are plenty of resources available to learn about investing in stocks and bonds. I also recommend working closely with a financial planner to help you navigate the financial markets. At January Financial we are very passionate about investing in real estate and are here to be a resource to you in that area.

Generally speaking I believe people should be financially diversified, which means your assets shouldnt be tied up in any one asset - especially your house! By liberating the equity from your home and investing in different asset classes and areas, you reduce risk while increasing your potential return. Investing in stocks allows you to take part in great businesses and share in their success, without the time and energy of actually working on the business. Investing in bonds provides steady income while lowering the overall risk of your portfolio. Finally, real estate in my opinion offers the most accessible, least risky, most exciting way to get rich slowly.

In Part III Im going to cover a few of these reasons as well as why I think everyone should have investment real estate as a significant portion of their portfolio.