The Indian Dream often revolves around property ownership. Bricks and mortar represent stability, security, and a legacy to pass on. But what if your dream house becomes a financial burden? Many Indians find themselves asset rich, cash poor – holding valuable assets like real estate or gold, yet struggling with everyday living expenses. So lot of Indian household assets are held in the form of homes or flats or gold jewelry.
But the problem with viewing at these as assets is that families and individuals do not have the heart to sell the home or family gold for any reason other than extreme distress. So in this case do we even view these as assets.
So a household with multiple parcels of land, homes and gold in the locker might be running into cash flow issues. What is the point of having these riches but not having enough money to spend on things that make life enjoyable like travel, eating out or donating to charity.
Why Does This Happen?
There are several reasons that contribute to this phenomenon:
Cultural Focus on Land: Land ownership has deep cultural roots in India. Families prioritize owning a home, even if it stretches their finances thin. This can lead to situations where a large portion of their income goes towards hefty mortgages, leaving them with limited cash flow for daily needs and future goals.
Limited Investment Options: For many, real estate and gold have been the traditional safe havens. These tangible assets provide a sense of security, but they may not always offer the best returns. Financial instruments like stocks and mutual funds, which have the potential for higher growth, are still seen as risky by some. This limited investment approach can restrict their ability to build a well-rounded portfolio that offers both stability and growth.
Illiquid Assets: Real estate, especially ancestral property, can be difficult to sell quickly. Renting it out might not generate enough income to cover expenses, particularly if rental yields in the area are low. This lack of liquidity traps their wealth in a single asset, making it challenging to access cash for emergencies or unforeseen circumstances.
Rents are very poor Return on Investment: Most families giving out properties on rent only get a return from 2.4 - 4% CAGR or Compounded Annual Growth Rate. Compare this with other instruments and see its not a very high number. Unless you were really lucky and selected a very good property at the right time rental income is going to not provide you with good cash flow.
Breaking Free from the Cycle
So, how do you escape the asset-rich, cash-poor trap? Here are some strategies to consider:
Rethink Your Portfolio: Diversification is key. Consider allocating a portion of your assets to more liquid options like mutual funds or bonds. This provides some financial flexibility and the potential for higher returns compared to traditional investments. A financial advisor can help you assess your risk tolerance and create a diversified portfolio that aligns with your financial goals.
Unlock Home Equity: Several loan options allow you to leverage your property's value for cash. These include home equity loans and lines of credit. However, it's crucial to use these funds wisely. They can be helpful for emergencies, debt consolidation with high-interest debts, or even as a down payment on income-generating investments like another rental property. Remember, using home equity loans increases your debt burden, so careful planning and responsible use are essential.
Plan for the Future: Don't get caught unprepared for life's future expenses. Factor in potential healthcare costs and retirement needs while making financial decisions. Start investing early for retirement to avoid a cash crunch in your golden years.
Seek Professional Advice: A financial advisor can be a valuable asset. They can help you create a personalized plan to build a balanced portfolio, improve your cash flow, and achieve your financial goals. Don't hesitate to seek professional guidance to navigate the complexities of financial planning, especially if you feel overwhelmed by the asset-rich, cash-poor situation.
The Bottom Line
Being asset rich isn't a bad thing, but it shouldn't come at the cost of your well-being. Families should be prudent in spending their money to buy real estate which is beyond their means. Taking on too many loans like car loans and credit card loans destroy the ability of families to save. Remember, a balanced approach that prioritizes both asset growth and cash flow is key to financial freedom.
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