I was reading a great book today. The legendary David Chilton’s newest book, the Wealthy Barber Returns.
I came across this passage, “each year, the Washington Post runs its Mensa Invitational contest where readers are asked to add, subtract, or change one letter of a word to give it a new meaning. One year’s winner was cashtration. The act of buying a home, which renders the subject financially impotent for an indefinite period of time.”
I agree with Mr. Chilton’s assessment that it is very clever and I wish I came up with it myself.
I am a huge supporter of adding assets into my wealth portfolio. The mistake that most people make is they simply don’t know what an asset really is. Most people believe that an asset is stuff they own. The more sophisticated say that it is stuff that appreciates over time.
I tend to feel that a true asset is something that generates enough cash flow to (at minimum) sustain itself, and ideally creates cash flow that will support your personal expenses. An asset will not only cover its pure expenses, but also its debt servicing.
Let’s go over items that most people regard as an asset that, in fact, can lead to personal cashtration.
Cottage – it is no surprise to most that a cottage is an expense. Yes, over time it may appreciate, but you can never completely bet on appreciating values. When you consider property taxes, utility expenses, insurance, occasional repairs and debt servicing, this is a true expense.
Personal Residence – this one might generate a few arguments. How many times do we hear parents say, my house was my best investment I ever owned. This could very well be because they never owned any other investments. I agree that you need to live somewhere, however, as long as you contend that it is a needed expense, we can all agree.
Downtown Condo Rental – to your credit, you are trying to add assets, but you are just missing the mark. That is of course, if the rental income generated from the condo does not exceed the carrying costs.
So! How to avoid cashtration you ask. Simple. Make sure that any asset you own carries itself and actually contributes to your income.
We’ve all heard the expression “2 income household”. That typically refers to a household where both spouses bring home an income that contributes to the household expenses. Why can’t you have the goal of having a 10 income household. Some might think that this means having some harem of women all working towards the household income. OK, that’s the first thing I think of anyway.
But what if you add assets that pay you money on a regular basis. For me personally, I have my own realtor income. My wife’s salary. Our RRSP’s and other paper investment’s dividends. Finally, each property I purchase must contribute to the family income.
This way if one of the incomes dry up, like my wife’s job ending or one of my properties unable to rent for 6 months, then we have alternative sources of income.
Not quite the harem of women solution, however, I’m pretty sure that option would have its own host of challenges too.