WHAT does it mean to be “house poor”? This term describes a situation in which most of one’s resources are invested in a house than in liquid assets. It is also referred to as “house rich and cash poor”.

The opposite to this term is “cash rich”, which means that an individual, economy or an entity has a significant amount of financial resources to spend or invest. It’s everyone’s dream to own a house but careful consideration should be taken when buying one. House costs includes mortgage payments, property tax, insurance and maintenance costs. You are house poor if most of your monthly income covers housing expenses. Owning property is an important long-term asset. However, consideration must be given to having some level of liquidity for emergencies and changing circumstances such as job losses, salary cuts, or unexpected expenses such as health costs, motor vehicle loans and other financial obligations.

There are many pre-retirees and retirees who have paid off their mortgages but yet struggle to keep their heads above the financial waters. Often, new homeowners will lament that they are cash poor, having exhausted all their financial resources in securing a home. In the absence of an emergency fund, if there is a change in their career or should a new financial obligation arise, there is no cash reserve. A study by Harvard University on Housing Wealth and Retirement Savings revealed that “housing and housing wealth” play an important role in providing financial security for persons as they enter retirement. It showed that, particularly in the United States, residential real estate is the main asset owned by people aged 65 and older. The study, however, revealed that more retirees are faced with increasing debts in retirement and some are reluctant to downsize their homes.

In planning for retirement, the asset mix is very important. Pre-retirees, while investing in residential homes, should ensure that their investment portfolio includes stocks and bonds in order to avoid the risk of being house rich and cash poor. It is recommended that mortgage payments be kept at 25 per cent of income. Some experts say that combined monthly expenses should not exceed 36 per cent of gross monthly income. This guide will aid personal financial management, ensuring that mortgage payments don’t become a burden and that increasing debt to cover income shortfall is avoided.

And consideration should be given to other recurring financial obligations so that mortgage payments are manageable. At least 6–12 months of recurring monthly expenses should be in an emergency account. This will protect homeowners against becoming house rich and cash poor. In purchasing a house, a prudent guide is to spend up to two-and-half times of one’s gross salary to cover cost.

Always be mindful that life isn’t static. Earning an excellent salary now doesn’t mean it will always be that way. It is best to pay yourself first by saving and investing a portion of earned monthly income. Make it a habit — that way, when financial challenges come you can weather the financial storm.

Recently, a young professional wanted to leave her parents’ home and purchase a new vehicle and buy her own home but when she did the calculations she recognised that she would become cash poor. The decision was made that she would stay at her parents’ home for at least another year and invest her earnings in an emergency fund consisting of bonds, as well as invest long term in stocks.

Also, keep a check on your expenses. At a meeting with a retiree this week, his phone rang. It was a representative from his bank with an offer of another credit card. He was a little annoyed as another credit card is not a priority for him at this time. This retiree decided not to increase indebtedness but to instead build and diversify his assets. It is indeed tempting for retirees to have several credit cards, but it’s a temptation worth resisting.

Pre-retirees and retirees can consider taking a second job or delay retirement, thereby increasing their income in order to avoid being house rich and cash poor. Downsizing homes prior to retirement or during retirement is another way to protect against being house poor. Such action also provides much-needed funds for other obligations. Cutting back on expenses and delaying gratification are other ways to avoid being house poor. Remember: You may be the one to take care of an elderly parent or parents. Do you have the resources? Is cash easily available? You want to be financially free, but bad decisions and poor financial habits can derail your best intentions for wealth creation. A mortgage may extend to 30 years, the same amount of time you may spend in retirement. The decisions we make today will determine the future we have tomorrow.

Grace G McLean is financial advisor at BPM Financial Limited. Contact her gmclean@bpmfinancial. and visit the website: www.bpmfinancial.com. She is also a podcaster for Living Above Self. E-mail her at livingaboveself@gmail.com