Monitor your asset ratios to avoid becoming asset-rich, cash-poor

May 26, 2024 | Insights

Cash is king, and your asset ratios will help you avoid becoming asset-rich, cash-poor, and a slave to your financial ego
A well-targeted asset ratio is essential for achieving life goals and securing your future. I don’t apologise for repeating this story because, like last week, it leads back to the crucial aspect of personal finance: liquidity. Liquidity is the lifeblood of your financial health, ensuring you have the resources you need when you need them.

I visited a recently retired couple in their house in Leeds some years ago. They asked if I could help with money issues. They were delighted to see me one Saturday morning, and they spent an hour showing me around their house, which they had refurbished to the highest standard, right down to the gold taps in the bathroom.

When I eventually sat down with them to discuss their financial issues, they summarised their problem succinctly: they had no cash. All their cash, including tax-free pension lump sums, had been used to turn their house into their dream home. And now they had no money to buy flights to visit their daughter in Australia. Technically, their asset ratios were zero per cent liquid assets and one hundred per cent illiquid assets.

The perils of being asset-rich and cash-poor

Unfortunately, thirty years later, I still see people making the same mistake. Last year, friends spent all their capital and more (borrowed) refurbishing their house. With the inevitability of an onrushing train, redundancy landed on their new doorstep just as they finished.

Cash is king, especially if your other assets are illiquid. I learned this lesson in the early nineties when the property cash left me unable to sell my flat and start a new life. It was not a good situation to be in.

These stories demonstrate why the asset mix ratio is so important. They also illustrate the importance of money maturity and a good relationship with money. In all these cases, individual egos got the better of common sense. Money is undoubtedly a proxy for the ego, which can be damaging.

Your asset ratio will tell you a thing or two.

The stories also demonstrate why your goals and aspirations should drive financial strategies, not vice versa. If you think personal finance is just about investment returns, you have missed the point. Personal finance is about having the right money in the right place at the right time. Here is how to make it happen

  1. Calculate the value of your assets and classify them as liquid (immediately available), semi-liquid (available in a few weeks but vulnerable to falling asset values, fees and taxation) and illiquid (unavailable in the foreseeable future).
  2. Calculate the total net value of all your assets.
  3. Calculate the ratio of each of the three asset categories to this total.
  4. Given your current and future circumstances, work out what you would like the ratios to be (I wrote last week about a client who was only comfortable with his ready cash exceeding £100,000. What do you feel comfortable with?)
  5. Plan how to bring your actual ratios into line with your chosen ratios (this will probably involve saving, investing and spending)

As a rule of thumb, you should have enough income and liquid and semi-liquid assets to fund your lifestyle for seven to ten years.

How does your asset ratio compare to this?

Photo attribution

Photo by Annie Gray on Unsplash

Audio link

https://audio.com/jeremy_deedes/asset-ratios/

Taking it further

Read my book, Right Money, Right Place, Right Time (ping me to get a free pdf version)

Related posts

How to save for security without trading your lifestyle

8 financial ratios to tell which way the wind is blowing

How to beat financial fear

https://wordsnotdeeds.co.uk/money-worries/

My name is Jeremy Deedes. I work with seasoned independent consultants to make sense of their finances and develop a better relationship with their money. This transformative approach allows my clients to achieve their personal and professional goals with confidence and clarity, paving the way for a calmer, more fulfilling path at home and work.

Discover your money maturity score by taking the Money Maturity Quiz at https://shrtm.nu/n2D. It’s free, takes only a few minutes, and you will get your score and recommendations by email immediately.

Then, use the link below to schedule a free 20-minute call with me so we can start you on the path to understanding your money and creating a new story to tell your family and friends.

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Your views are important, and your fellow readers would love to hear your opinion, so share your thoughts in the comments box below, and thank you for your time and generosity.

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