As far as I’m concerned, the aim of building wealth is to be able to provide us with the lifestyle that we choose, both now and into the future. The recent property boom has seen many everyday people accumulate significant wealth. Unfortunately, this is not transferring to an increase in lifestyle opportunities.
I met with a client this week that had benefited from the property boom and had managed to accumulate approximately $1 million in equity in her investment properties. She also owned her own place unencumbered.
Despite building enough wealth to easily meet all her financial goals, she was living very miserly and was unable to do a number of things due to lack of cash flow. In fact, she was living week to week and was feeling some financial stress.
Furthermore, even minor events, such as maintenance to any property, an interest rate rise or a week or so without rent would place the client into a risky position. She may have insufficient funds to meet even basic living requirements.
This served as reminder that the aim of financial planning isn’t to make as much money as you can. It is to utilise your income and assets in an effective way to achieve your financial goals. This client, despite being a millionaire, was not able to maintain a lifestyle that befitted her wealth.
The client was certainly well placed to have sufficient wealth to meet her goals in retirement; in fact, calculations indicated that she would probably have enough funds to have more than twice the income she had now.
This is an imbalance that makes little sense.
By releasing some equity in her properties, she was able to significantly improve her current disposable income, and would, in all likelihood, have more than enough to maintain her lifestyle in retirement.
Retaining all the investment properties would, most likely, result in making her more money over the next 15 years; however, it would also result in the client barely making ends meet and unable to afford many of her current goals, despite having substantial wealth.
The balancing of the financial needs of today and tomorrow is a common conversation in financial planning. Most times, it is encouraging our clients to have an eye to the future not just the here and now. In the case of the asset rich like this client, we have the reverse conversation.
It is important to be prepared for the future, but not at the expense of your current lifestyle.
Alex McKenzie, Future Financial Services
Alex McKenzie is a financial planner, and the owner of Future Final Services in Penrith. He is a graduate of Western Sydney University.