Earlier this week, I met with clients with two children who are currently engaged to be married. That means that within the next five months, they need to make two weddings. Before we even started to discuss how they could pay for two weddings in such a short amount of time, they said that they wanted to thank me.
They proceeded to tell me that when they had originally come to meet with me seven years ago, they were contemplating buying a house in a settlement for $500,000. They said that I encouraged them not to use every last shekel that they owned to put into the apartment but, rather, to buy something a bit smaller and keep $100,000 in the bank. They went ahead and followed my advice, and today they have over $150,000 in their brokerage account and own a home. Most important, they said that they can easily make the two weddings, help their kids get started, and still have a nice amount left in their account.
This was refreshing for me on two fronts. To start with, it’s not every day that I get thanked. More importantly, this couple heeded my warnings about not tying up their entire net worth in an apartment.
When we are younger and start to accumulate wealth, one aspect that we tend to neglect is the need for liquidity. I have met so many people over the years who have invested everything they have in their apartment. I’m not even talking about those who overbuy, and while they have beautiful homes, the monthly mortgage payments are suffocating them. I have indeed spent many columns writing about the importance of saving in any way possible. The more you can save and invest, the better. But there is another very important aspect that requires attention, and that’s liquidity.
What is liquidity?
Liquidity is the ability to quickly convert an investment into cash without losing any of the principal that you’ve invested. For example, a savings account is highly liquid. In contrast, real estate is considered to have low liquidity because of the time it takes to sell the property and the fact that if you need to sell quickly, like a fire sale, you will end up paying the piper as the price of your property will drop. Don’t believe me? Well, I have a good friend who, a few years ago, bought an apartment in a very desirable neighborhood (part of the desirability is because we live there too) at a 20% discount because the divorcing couple had to sell.
Just like my story with the couple with two children currently engaged, I work with many clients who are at the stage of starting to marry off their children. When we start to plan, they tell me how much their home is worth and how much it has appreciated. That’s fantastic, and it’s turned into a nice investment over the years. So, what’s the problem? They ended up putting every last cent they had into their home. While they may have a very respectable net worth, 98% of their money is tied up in a property. How will they pay for the wedding or some other large expense? You can’t take a saw and cut off a room and say, “Take a bedroom; it’s worth $50,000.” It just doesn’t work that way.
Cash
Most financial advisers recommend building an emergency cash fund of between three and six months for your monthly expenses. If you spend NIS 15,000 a month, you will want to have a minimum of NIS 45,000 earmarked for this emergency fund. This will help you survive for a limited period if you lose your job, are too ill to work, have a car repaired, need dental work, have fridge breaks, etc.
Invest
After filling up your emergency fund, you need to make investing for the medium and long term a priority. By constantly adding to savings and getting that money invested, you will be able to start building a nice nest egg that can be used for expenses like weddings and, of course, for retirement.
As I have written, any savings are better than no savings. But it’s better to be smart about your finances. By saving money in parallel tracks, apartments and liquid financial investments, you will be able to enjoy your upcoming occasion a lot more knowing that you can pay for it by selling some stocks as opposed to going into debt by borrowing against your high-priced apartment.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.
Aaron Katsman is the author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing (McGraw-Hill) and a licensed financial professional both in the United States and Israel, and he helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net). Member FINRA, SIPC, MSRB, FSI. For more information, call (02) 624-0995 visit www.aaronkatsman.com or email aaron@lighthousecapital.co.il.