What’s the risk of becoming asset-rich (i.e. lifestyle-rich) and cash-poor?

As homeowners in many areas in New Zealand have experienced double-digit growth in the value of their homes in recent years, many of us will be feeling wealthier. Some may have taken the opportunity to update their car, buy a boat, travel or acquire a bach. These are known as “lifestyle” assets, or expenses, and we Kiwis love them.

In 2017 new car sales totalled 108,000, an increase of 6% over 2016.[1] That’s a lot of new cars and demonstrates a substantial and increasing spend on lifestyle assets.

With all that spending on lifestyle assets, a good New Year’s resolution would be to conduct a health check on your financial affairs.

What does the family balance sheet look like? Lifestyle assets include our house(s), cars, boats and those other items that don’t produce disposable income. Investment assets include; KiwiSaver, bank deposits, shares, bonds, managed funds such as Milford’s Investment Funds, plus income producing property. Lastly, consider debt levels and structure – the sooner debt is reduced the greater the opportunity to substitute debt repayments with savings into investment assets.

Now, look at cash flow – your income minus spending. Check the bank statement and credit card accounts and add up your income and expenses. Are you still in the “black” or worryingly in the “red”? If you are in the “red”, you will be spending more than you earn, thereby drawing down on investment capital or acquiring more debt. How sustainable is this? e.g how long will the investment capital last? Potentially not long enough to support your needs over the long term.

Once we enter retirement, the risk of spending more than we earn is high. Particularly in the early years of retirement when we are ticking activities off the bucket-list or trying to maintain the same lifestyle as when we were working. This risk is also high later in retirement when we face increasing health care or retirement village costs.

It’s very hard to eat our house one room at a time and our other lifestyle assets are generally not worth as much as we think. Have you ever been happy with how much your second-hand car is worth?

Therefore, for most of us, we need to concentrate on building our investment assets to create sufficient capital to support our years in retirement. This will probably mean forgoing some spending on lifestyle assets. Think of it as deferring the spending. It’s not that you won’t have those things – just not now, while you are building assets to support your future.

KiwiSaver is a great solution for those that are young enough and who select an appropriate fund based on their risk-tolerance and time frame i.e. years until retirement. Investment Funds such as the Milford’s Funds and Private Wealth Service are another valuable tool to use in building investment assets.

The sooner we start the better. The miracle of compounding investment returns means the longer we can save, the more it will contribute to building investment assets to the level needed to support our future lifestyle. Thereby avoiding the trap of becoming (lifestyle) asset-rich and cash-poor.