Why asset rich is not the same as cash flow rich

Net Worth and Goals MemeKJ: There is a huge difference between someone being asset rich/poor and cash flow rich/poor. “How can this be?” you might say. Shouldn’t everyone who has $5,000,000 in assets be cash flow rich and be able to do what they want? The answer may surprise you. While the figures below would put these fictitious people in the 1%, it may not be so cozy for one of these families, and an example outlining the two concepts may help put it in perspective.

Family scenario one details:

    Two people, age 65, recently retired
    Net worth of $5,000,000
    Home value of $2,000,000 with a loan of $500,000
    Second home value of $750,000 with a loan of $250,000
    Retirement accounts of $2,000,000
    Regular investment savings of $1,000,000 (with 50% in private equity)
    No other loans
    $50,000 per year in total household inflows
    Living expenses of $175,000 per year

Family scenario two details:

    Two people, age 65, recently retired
    Net worth of $5,000,000
    Home value of $500,000 with no loan
    Second home value of $500,000 with no loan
    Retirement accounts of $2,000,000
    Regular investment savings of $2,000,000
    $50,000 per year in total household inflows
    Living expenses of $175,000 per year

Some notable differences
Can you see how different these two scenarios may be? Their net worth is the same, their cash inflows are the same, and their living expenses are the same. However, the first couple has a significant amount of their net worth tied up in their multiple houses (not to mention, that’s probably a significant contributing factor to their living expenses with the additional cost for upkeep, taxes, insurance, etc.). In fact, the first couple may feel quite constrained with their living expenses, but the second family may have much more flexibility for dining out at fancy restaurants, traveling to exotic locations, donating more to charity, gifting to family members, etc. If something happens in the market and their investments decline in value, they can more easily cut back on those discretionary expenses, whereas the first couple’s expenses are likely to be much less flexible at precisely the time where they may need it to be so.

Learn the roles of each component of your net worth
Part of building your savings and net worth over time is to understand the different components of your net worth. Some investments (often dubbed alternative strategies, hedge funds, private equity) may not be readily accessible if/when you need the cash, but additionally, your home may not be able to be sold quickly if you need the cash equity (if it even exists like millions of homeowners saw coming out of 2008). If you don’t have the wherewithal to know where to start, find someone who does!

All net worths are not created equal
It’s not all about the number next to your net worth that’s imortant, but it’s equally important to understand the composition of your net worth. Can you readily access the money if you need it or would it be cost prohibitive? If the economy is going through a slump, would that cause additional pressure on your net worth at the worst of times?

What should I do?
Much like it’s important to not put all of your eggs in one basket for investing, it’s equally important to do that for your overall financial well-being across different account types. Look to figure out what you and your family need to build each “bucket” of (1) readily accessible savings/CDs/money market accounts, (2) regular investment accounts, (3) retirement accounts, (4) use assets – home, cars, etc., and (5) HSAs, FSAs or other medical-related accounts. Research how you can access the funds and what flexibility (or lack-thereof) you have with the groups of assets, and play each one to its strengths and purposes in life. Build your personal balance sheet statement regularly and your long-term goals will much appreciate it!

    Are you “asset rich” or “asset poor”?
    Are you “cash flow rich” or “cash flow poor”?
    Tell us about what you can do to improve your situation.

Why “asset rich” is not the same as “cash flow” rich is copyrighted by TheSimpleMoneyBlog.com without consent to republish.

Some of the links in the post above may be affiliate links. This means if you click on the link and purchase the item, we will receive an affiliate commission. We feel strongly about only recommending products or services we use personally and/or believe will add value to you, our readers. Read more about our commitment to providing quality product recommendations.

Share in the Discussion