Recently I met with clients with two children currently engaged. That means that within the next 6 months they need to make two weddings. Before we even started to discuss how they can pay for two weddings in such a short amount of time, they said that they wanted to thank me. They proceeded to tell me that when they had originally come to meet with me 6 years ago they were contemplating buying a house on a yishuv for $400,000. They said that I had encouraged them not to use every last shekel that they owned to put into the apartment, rather to buy something a bit smaller and keep $100,000 in the bank. They went ahead and followed my advice and today have over $150,000 in their brokerage account and own a home. Most importantly they said was that they can easily make the two weddings and help out their kids get started and still have a nice amount left in their account.
This was refreshing for me on two fronts. To start with it’s not every day that I get thanked! More importantly is that this couple heeded my warnings about not tying up their entire net worth in an apartment.
When we are younger and we start to accumulate wealth one aspect that we tend to neglect is the need for liquidity. I have met so many people over the years that have invested everything they have in their apartment. It’s true that I have spent many columns writing about the importance of saving in any way possible. The more you can save and invest the better. But there is another very important aspect that needs to be paid attention to and that’s liquidity.
What is liquidity?
Liquidity is the ability to quickly convert an investment into cash, without losing any of the principal that you’ve invested. For example, a savings account is highly liquid. In contrast, real estate is considered to have low liquidity because of the time it takes to sell the property and the fact that if you need to sell quickly, like a fire sale, you will end up paying the piper as the price of your property will drop. Don’t believe me? Well I have a good friend that just bought an apartment at almost 20% off because the divorcing couple had to sell.
Just like my story with the aforementioned couple I work with many clients who are at the stage of starting to marry off their children. When we start to plan they tell me of how much there home is worth and how much it has appreciated. That’s fantastic, and it’s definitely turned into a nice investment over the years. So what’s the problem? They ended up putting every last cent they have into their home. While they may have very respectable net-worth, 95% of their money is tied up in a property. How will they pay for the wedding, or some other large expense? You can’t take a saw and cut off a room and say, “Take a bedroom, it’s worth $50,000.” It just doesn’t work that way.
Most financial advisors recommend building an emergency cash fund of between 3-6 months your net monthly income. If you net NIS 15,000 a month, you would want to have a minimum of NIS 45,000 that you have earmarked for this emergency fund. This will help you survive for a limited period of time if you lose your job or are too ill to work.
After filling up your emergency fund you need to make investing for the medium and long-term a priority. By constantly adding to savings and getting that money invested, you will be able to start building a nice nest-egg which can be used for expenses like weddings and of course for retirement.
As I have written, any savings is better than no savings. But it’s better to be smart about your finances. By saving money in parallel tracks, apartment and liquid- financial investments, you will be able to enjoy your upcoming simcha a lot more knowing that you can pay for it by selling some stocks as opposed to borrowing against your hi-priced apartment.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates. Aaron Katsman is author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing (McGraw-Hill), and is a licensed financial professional both in the United States and Israel, and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net). Member FINRA, SIPC, MSRB, FSI. For more information, call (02) 624-0995 visit www.aaronkatsman.com or email firstname.lastname@example.org.