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lessons from the train

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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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13 comments for “lessons from the train”

  1. This article took an interesting turn. I was interested in the “What if” fund, as I recently started three new e-savings accounts on the back of a previous post that discussed, among other things, the importance of the emergency fund.

    Until then I had been using my ‘emergency fund’ to save for the summer holiday I want to go on, but realised that you shouldn’t chop and change the purposes of the fund. I now have a holiday fund, emergency fund, and something imaginatively named “e-savings” fund. I think I will change it to a “What if” fund, as it will be the one fund that is used the most for one-off purchases of slightly higher-priced products. x

    Posted by Kerstin Doe | May 2, 2008, 11:44 am
  2. @Kerstin:
    Yeah, I thought it was a pretty meandering post, but sometimes those work out nicely. I’m glad you liked the idea.

    Posted by plonkee | May 2, 2008, 12:32 pm
  3. I recently wrote another (unpublished) guest post on how net worth in stocks is only sort-of worth since you have to sell the stocks at the price you think they’ll sell in order to truly have the money. Otherwise you have less and until you sell you have less worth and more stock.

    I imagine most peoples’ net worth is tied up in similar fashions. But hopefully if this guy could build up that much in other things, he can find a way to free some up or build up more for the house.

    I like the “what if” fund. I’ll be writing about that soon, and why it’s handy. In my case it’s the “siblings-in-law decide to give mum-in-law something really nice for mother’s day…do you have the cash?” I think it’s a great idea, but we were just lucky to have that exact amount coming in from something random.

    Posted by Mrs. Micah | May 2, 2008, 12:39 pm
  4. @Mrs. Micah:
    Oh no, the competitive sibling thing sucks. But of course, it’s very important that you don’t look worse than the other lot. Very important, especially where in-laws are concerned.

    Posted by plonkee | May 2, 2008, 12:56 pm
  5. Well you gotta manage your funds and how you can access them. People with a lot of money either use up that money to buy goods and then all there value is in goods. Others use it for investment purposes and then can’t touch that money after some time. And others keep that money in cash, so it’s always available and just sitting in the bank collecting some measly interest rate.

    Nevertheless the third group can always access that money for whatever reason and while they may not have a fancy house and car and such, they always have the choice that if they ever wanted one then they could get one.

    Most people nowadays are obsessed with having goods and thus they gulp up as much as they can not realizing that maybe they should wait a while and get everything settled in there life first.

    Posted by Save Money | May 2, 2008, 4:02 pm
  6. I think the issues you discuss here are one of the reasons most people are holding back right now and not buying real estate. I bought a house at the peak of the bubble, an inexpensive house with a low payment. I don’t regret it. My rent was double the mortgage payment and the house was nicer, and I had to live somewhere, so instantly saved as far as the cost of living somewhere went. But two years later the price I could get for the house plummeted to half of what I paid for it. I still own it, it’s cheap to live in, and I can rent it out if I move, but as an investment, I don’t know. I’m definitely stuck with it for a few years here.

    Posted by Pam Grundy | May 3, 2008, 2:52 pm
  7. Yes, I guess that it’s perfectly possible to use property as an investment, it’s just hard to time and diversify.

    Posted by plonkee | May 3, 2008, 8:06 pm
  8. Property investing is just like any other, buy low, sell high :).

    Posted by Save Money | May 4, 2008, 12:10 am
  9. Actually, about the in-law thing, she wants to give it as a family because she can’t afford it either (being only 21). So even more pressure, as it were. Because if we don’t pitch in, the other sibs can’t afford it. But if we all pitch in some, then we can.

    Posted by Mrs. Micah | May 4, 2008, 1:11 am

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