Make This Mistake and Your Assets Will Bleed You Dry

It’s Not About the Assets, It’s About the Cash Flow

Imagine you own a castle in Ireland worth $10 million, debt-free.

Go ahead. Imagine the grand staircase, the mullioned windows, the topiary. All of this grandeur is yours. Nice, isn’t it? Now imagine you have ZERO income, the castle needs $100,000 in maintenance a year, and you can’t kick your champagne habit.

How does the fantasy feel now?

You own a cash flow crisis masquerading as a castle. This is a common personal finance “thought error.” We focus too much on our net worth and not enough on our cash flow. We get so high tallying up our net assets that we fail to see when they turn into liabilities.

How it happens:

We toss pre-tax, after-tax, liquid and illiquid assets in the same mental bucket. We then fail to connect them to the cash flow they generate or require. All of our money-grubbing assets hide behind a psychological moat, safe from the invading reality of possible bankruptcy. A castle is an asset on paper, but if it’s sucking up cash, it’s a liability.

Being asset rich and cash poor is not a problem, given positive cash flow.

But it’s a colossal problem when you have no income and no plan for generating it. Castles are hard to sell quickly. You can’t borrow when you have no income and are hemorrhaging cash, even if you own a palace. Banks might lend you a fraction of its worth, but the income problem is only temporarily solved.

Now’s a good time to check your net worth statement for possible vampire assets.

Photo credit: pathlost, CC BY 2.0, via Wikimedia Commons