As summer winds down, maybe you’re lucky enough to catch one last beach weekend with the family. Sipping coffee as the sun rises over the water, burying your toes in the warm sand, strolling down the boardwalk…it’s all so idyllic.
Maybe, like me, on a weekend like this a member of your family has suggested, “You know, we should do this all the time. If all of us went in on a down payment, we could have a family vacation home.”
And maybe, if you’re really like me, you raise an eyebrow, taking in the 6 “For Sale” signs in a neighborhood of about 15 beach cottages. If it was a stock or a bond, and 40% of all investors were selling, I would think twice before buying in.
If you have the income to cover two homes, it can be a wonderful thing to have a vacation retreat where the family can gather. But even with all the joy a vacation house can bring, it’s not a decision that should be made emotionally.
Of course, the way most people get the idea to buy a vacation home is with the kind of conversation that came up with my own family. They get excited about all of the great times they’ll have in the new house, and focus in on the details, like browsing for houses to buy online, figuring out how much money would be needed for a down payment, who to use as a property manager, etc…sometimes before really considering the big picture.
Cash Flow Versus Net Worth
Cash flow is the “portrait view” of your finances. Companies use cash flow statements in quarterly reports for investors, but for individuals, a personal cash flow statement is equivalent to a monthly budget. It’s a list of all the income coming in and the expenses going out.
Of course you would consider your cash flow before taking on debt to buy a house. That’s why car commercials often have “Own for just $250 a month!” rather than “Own for $35,000!” in their commercials. It’s much easier to think about how to fit a small amount in your budget than a large lump sum. But it’s important not to forget about that lump sum of debt (especially because the actual amount you would pay for that $35,000 car loan ends up being $38,675 at a 4% interest rate over 5 years). Use your monthly budgets or cash flow plans as a tool to increase your overall net worth.
Net worth, on the other hand, is the “landscape view” of your financial life. It’s the bigger picture of your debts and assets, and of course over time you want the assets to far outpace the debts , thus increasing the size of your net worth!
Sometimes it does make sense to buy additional property to increase one’s net worth, but liquid assets should come first (ie. savings and investment accounts). Should a cash flow problem arise (like the loss of a job or a lack of vacation home renters), it’s imperative to know you have assets you can liquidate to meet your needs. Asset liquidity gives you the ability to “be your own bank,” and is crucial to maintain and grow wealth.
The Landscape View
So should you buy a vacation house? It all depends on what you want your net worth landscape to look like. For example, if the numbers work out in your monthly “portrait view” but not your long-term “landscape view,” you might want to reconsider. But if your cash flow and net worth are otherwise healthy, it may make sense to diversify your income stream with a rental property—or just to have a second home for you and your family to enjoy, particularly during a historically low interest rate climate. Of course, this applies to any major expense item you may be considering.
The bottom line is to always consider the big picture. Take an honest assessment of your financial health, and make decisions for the right reasons . Approach any investment decision with a clear head, and prioritize investment goals in a disciplined manner. Keeping your financial picture diversified, liquid, and simple will help you to expand your net worth over time.
Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Halpern Financial, Inc.. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Halpern Financial, Inc. is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Halpern Financial, Inc.’s current written disclosure statement discussing our advisory services and fees is available for review upon request