Building Wealth: The 10 Year Rule
Building wealth isn’t about how much money you make but how you connect your wealth to your values and the strategies that will allow you to build on your wealth.
Even though we have to make personal financial decisions daily, we don’t learn about wealth or personal finances in school. This makes it extremely important to learn about building wealth and sharing those strategies with family and friends to be passed down for generations to come. Most of us grew up with household rules or standards that we were expected or required to follow within our house. You may be required to take the trash out or be home before a particular time; those are considered the code of conduct for your household. Whether intentionally or unintentionally, we inherit these standards and pass them down to future generations. My parents lived paycheck to paycheck, so there were no conversations about managing debt, planning for college, investments, etc. I share that with you because the concept of loan amortization is a rule or code of conduct that, once understood and followed, can help you accumulate wealth.
One way that we can establish wealth is through obtaining property. My philosophy is that every person should own at least two properties in their lifetime.
Ownership is one code of conduct I make sure my family and children understand the importance of. One dynamic of homeownership is amortization. Loan amortization refers to how a loan balance is broken down into equal repayments based on the loan amount, interest rate, and principal. An amortization schedule lets borrowers see how much interest and principal they will pay each month, as well as the outstanding balance after each payment. Following the proper amortization schedule can help you build wealth. This is where what I like to call ‘The 10-Year Rule’ comes into play.
When you are in the process of acquiring a home, there are many things that you want to keep in mind, one being your debt-to-income ratio and how much you can afford overall for a house. Never purchase a house that’s at the maximum of what you can afford. You want to be able to pay your mortgage off as soon as possible. By getting a house that is at the maximum of what you can afford, you’re automatically locking yourself into a 30-year mortgage without the opportunity to pay it off early. You want to settle on a price that enables you to beat the amortization schedule. Mastering the 10-year rule when it comes to your amortization will change the financial direction of your life. When you sit down with a title company, their goal will always be to make the most money off you; they will do that by offering you a low-interest rate, which lowers your monthly payments. Unfortunately, when you choose the lowest monthly payment, this can tack on the amount of time it takes you to pay off that loan. With a 30 year schedule, for the first 11 years, you will pay more towards interest than you will against your mortgage.
For prospective homeowners, simply knowing your interest rate is not enough to make an educated decision on a loan or buying real estate. Adhering to a 10-year amortization schedule can give you the freedom to acquire more properties in less time. When paying extra every month towards your principal, you will own the deed to the property in 10 years. The value of your property will still be going up, but you will have the deed in your pocket. I encourage you to educate yourself on amortization and the 10-year rule so that you can use it to your advantage when it comes to acquiring properties and building wealth.
Don’t wait until you enter your 60s or 70s to pay one house off when you can pay off multiple properties within that same time frame. Building wealth goes beyond the stock market. You can live your best life; it’s all about the strategies you use to do so.
