I recently read about a very interesting predicament for a reader on Free Money Finance – one that is, unfortunately, all too common.
Here is what the reader asked on the post on FMF:
To start off, my husband and I purchased our home in 1987 for a little over $100,000…..[ her husband died after a whole series of family tragedies]……The house is the only asset I have left and the only thing I have to pass down to our children.
Now, you will need to read the entire post on FMF just to understand the tragedies that this poor woman has had to endure …
…. on top of that, she now has to face an uncertain future because their only form of ‘financial planning’ was to own their own house.
This is an all-too-common story. In fact, I am reminded of two recent stories from my own family:
1. My wife’s mother died living on a government pension, no vacations, walked wherever she could, and otherwise penny-pinched to survive. Yet she died and left her three daughters (including my wife) a house worth nearly $800k and no mortgage!
2. My 95 y.o. grandmother (still living!) spends all of her income on supporting my mother and two sisters (all capable of working, but choose not to), struggles to pay her own bills (she had to borrow $40,000 from me to pay a Land tax bill). She gave my son a check for his birthday when we went to visit her last Christmas … the check bounced!
However, she just sold an investment property that she had held on to for many, many years (clearly, it became so run down that income was very low) for $4.5 Mill!
Kind of reminds me of the guy who lives like a miser but has a secret $1,000,000 stash of cash stuffed into his mattress.
These are examples of being ‘asset rich’ and ‘cash poor’ and, unfortunately, describes so many Americans reaching retirement age.
The solution is the 20% rule …
If you didn’t read the original post, this ‘rule’ says: have no more than 20% of your net worth tied up in your house (plus another 5% max. tied up in cars, furniture and other possessions).
That is simply another way of saying that you must have 75% of your Net Worth in income-producing assets (if you are at or near retirement age) or in a mix of income and growth assets (if you are at least 10 years off retirement).
If you are nowhere near retirement, and this will be your first home purchase … go ahead and break the 20% rule … but, reassess every year and make it your goal to build up enough free equity (that is, more than the 20% rule allows) … when you do, be sure to use that equity to invest or you will end up exactly where this post says you don’t want to be!
Having a house … and only a house … is no way to live.