plonkee money an english-er's thoughts on personal finance

May 2, 2008

lessons from the train

Filed under: Uncategorized — plonkee @ 11:15 am

I was on the train going to a business meeting the other day. I was sitting in one of those seats that are arranged in a four, with a table in the middle, and two men came and sat next to me. I tend to be a shameless eavesdropper (well, I couldn’t really help but overhear) in situations like that – I’m always hoping for new material for you guys and I wasn’t disappointed.

The two men were clearly business associates, and spoke about a number of general subjects, including renewable energy, funding for one of their pet projects (no idea what it was), local party politics, and the careers of their children away at University. The interesting story one of them told though, was about a friend’s mortgage application.

As the man on the train told it, he had a friend who was an extremely successful business man in London with a net worth well into seven figures. This friend was renting a flat in London, but wanted to move to the provinces and buy a place. Not a problem you might think. Well apparently not so. The friend couldn’t get a mortgage without stumping up a large deposit, which he didn’t have.

The two men on the train then went on to bemoan the credit crisis, the state of the housing market and the actions of the treasury and the government. But I was sitting on the train thinking about the wealthy business man who couldn’t get a 100% mortgage. They said it like it was indicative of a fundamental shift in the mortgage market, which for all I know, it may well be. But still, if your net worth is that high, and you can’t fund a house deposit then you’re doing it wrong, and you probably shouldn’t be looking to buy a house.

Having a really large mortgage puts you at significant risk of negative equity (where your house is worth less than the mortgage on it). I put down a 10% deposit on my house, and there’s a chance that I could well go into negative equity – the house opposite me took months and months to sell, and I haven’t checked yet what it went for in the end, but I don’t think it was more than the asking price.

The other problem which is probably more pertinent to the businessman in the story is the level of liquidity that you should have. Having a high net worth isn’t very helpful if when you want to access it, it’s tied up in investments, businesses or property. The beginnings of your stock of cash is your emergency fund, and it’s important to have something to hand that you can use if you really need to.

You could go further, though. What about the *what if* fund? This is the stash of money, for when it’s not an emergency, but you’d somewhat unexpectedly been offered a great deal on a new oboe, or the car that you’ve always wanted, or the trip to Antartica that you’ve been meaning to do for years. Sure, if you don’t have the money – you’re paying off debts, or your net worth is generally low – then you’ll have to do without. But if you do have the cash, but it’s tied up, you won’t be able to take advantages of opportunities to do the things that you want to do.

After all, once you’ve got the basics in place, money is just a means to an end, and something that can enable you to live the life you’ve always wanted to (within moderation of course). Don’t let a lack of liquid funds, stop you investing in enriching your life.

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