Managing family finances is more complicated than deciding when to break a piggy bank. As you put down roots in your community and plan for the future, you may find that you’re putting more resources into assets like your home. Sometimes, though, you may end up with a sizable net worth but not much cash in the bank.
Here’s what you need to know about how your home contributes to your total wealth, and how to approach balancing cash and assets.
Cash-Rich vs. Asset-Rich
In order to use your money to your best advantage, it’s important to start with a solid understanding of where your main wealth is concentrated. One way to do that is get clear on the difference between being cash rich or asset rich.
If you’re cash rich, you’ve got plenty of easily accessible funds on hand to use however you want. Any movie shopping spree montage or radio hit about dropping thousands on a bar tab is all about being cash rich. Entrepreneurs who live by the advice to “hustle until your bank account looks like a phone number” are focusing their efforts on cash, too.
Being cash-rich doesn’t always mean living a flashy lifestyle, as evidenced by some stories of surprise philanthropists. Living frugally in order to leave millions to your favorite causes is the epitome of a cash-rich approach to finances.
Alternatively, you can also tie most of your wealth into what you own. To take an extreme example, Jeff Bezos is one of the wealthiest people in the world. His net worth has been valued at over $150 billion! According to the Bloomberg Billionaires Index, approximately $4.48 billion of his fortune is in cash. That seems like more than enough to dive into, Scrooge McDuck-style, but it’s clear that the vast majority of Bezos’ wealth is tied into properties and assets through his companies.
For a more realistic example, an asset-rich family could be a family with a nice home, a vacation rental property, and a sizable stock portfolio. A meaningful chunk of their net worth is represented in things they own.
Is Real Estate an Asset?
An asset refers to any resource you have that is valuable and can be converted into cash. Just because something is expensive doesn’t mean it’s a strong asset, though. Something that depreciates quickly, like a car, generally isn’t a powerful asset.
Real estate, on the other hand, can appreciate in value over time. A home is generally the most valuable non-financial asset families in the United States own. Some families may even own multiple properties, such as a house they use as a vacation rental. If you’re a business owner, you may own property related to the business. Your accountant can help distinguish which assets you own as an individual versus which assets belong to the business entity.
One thing that makes viewing your home as an asset more complicated is that you rely on the property for your own use. You can’t simply decide to sell it without figuring out where you’d live instead. Whenever you do sell a home, there are also closing costs and other fees to consider. So even though your home may be one of your largest assets, you can’t necessarily tap into the full value of it the same way you could liquidate a stock market investment and use it as cash.
Is It Better to Have Assets or Cash?
Assets and cash are both important resources. In an ideal world, you’d strike the perfect balance every time between cash in the bank and well-chosen assets. In real life, most people find themselves better prepared on one side or the other at times. You may need to convert one type of resource to the other in order to meet your next goal.
Cash benefits and drawbacks
Some benefits of having cash are safety and simplicity. Most cash accounts make it easy for you to access the money if you want to. Cash is also generally an extremely safe investment. Accounts backed by the FDIC are insured against loss. Cash isn’t as affected by swings in the market as a stock share can be.
The downside is that it can be difficult for cash to appreciate in value, too. Most bank accounts offer very low interest rates, sometimes not even enough to keep up with inflation.
Asset benefits and drawbacks
A major benefit of putting your resources into assets is that they can appreciate in value. Historically, the stock market shows average annual returns of around 7%, once you adjust for inflation. That’s far better than the interest rates on most bank accounts, even CDs or high-yield savings accounts. (Of course, timing is everything, and you’re not guaranteed any specific return on a stock investment.)
Assets like real estate also often appreciate in value. Appreciation rates can vary, but the 25-year average is about 3.9%. Different events like economic shifts or even a health crisis can impact housing prices in your local market. Overall, though, many people expect their home to grow more valuable over time.
One downside of having assets is they’re hard to “spend.” Depending on the asset, liquidating it back into cash can be time consuming or come with costs of its own. If you sell your home, for example, theoretically you get a large influx of cash. But you also need to figure out another place to live, and a property sale comes with closing fees and paperwork. Even if you’re rich in the sense that you have a highly valuable home, you can still struggle with day-to-day cash flow.
Home equity vs. cash
The longer you make payments on a mortgage, the more equity you build up in your home. Equity is valuable because it represents the portion of your home that is truly yours. Feeling secure in your home is an essential part of meeting basic needs for your family.
With that in mind, the equity you hold in your home can also be a resource you can potentially access, if you need to. There are times when we need cash to handle a particular situation. That could mean paying an unexpected expense, or making a strategic move to put some equity value toward financing another priority.
Before you decide to tap equity to convert into cash (e.g., through a cash-out refinance, home equity loan, or another financing agreement), plan out how you’d use the money, and how you will pay the balance back. If you don’t have a solid repayment plan, you could ultimately risk your home.
What Are the Risks of Using Assets as Collateral?
The most important risk of using an asset as collateral is that if you can’t pay back your loan, the lender can take the asset. In terms of real estate, that means a lender can foreclose on your home if you can’t repay what you owe. Anytime you enter into a financing agreement that involves your home and equity, read all the paperwork carefully to learn about repayment terms and what happens if you’re late or miss payments.
In some cases, it can be helpful to explore financing agreements that don’t come with monthly payments. If you’re tapping equity at a time when you don’t have much cash on hand, it might be difficult to balance monthly payments with the other financial commitments you want to use equity funds to pay. If you don’t have monthly payments, that might give you more flexibility over how to approach saving money for a repayment.
Home Equity Sharing With Noah
Taking out a loan to access home equity, or any form of second mortgage, comes with some risks. If you can’t make your payments on time, you’re at risk of foreclosure.
Home equity sharing is a way to access home equity, but it’s not the same thing as a loan. You don’t make monthly payments. You probably won’t pay back the same amount as you initially received, either – Noah is investing in the homes of their partners. If the home appreciates, homeowners pay the repayment balance and Noah’s share of the increase in value. If the home depreciates, Noah takes part of the loss, too.
Because you’re sharing stake in your home’s value, not taking a loan, you don’t take on the same risks of foreclosure and losing your home. If you run into trouble paying your normal mortgage, Noah even offers a Homeowner Protection Program to help get you through tough times.
Would you rather be cash rich or asset rich? The answer depends a lot on what’s happening next for your family. There are times when converting assets into cash you need can make sense, as long as you enter any agreement with a clear sense of how to manage your money every step of the way.