There are some of you who are cash-rich but asset-poor. By this we mean that your current savings potential is substantial but you have not built a sizable investment and physical assets so far in your working life. The question is: How should you build your assets going forward? This question is important, especially if you are in your late 30s or older. In this article, we discuss two issues. One, the initial steps you should take to improve your asset position. And two, the steps you can take to avoid being asset-poor, if you are between 25 and 35.

Asset-poor

If you are cash-rich asset-poor, it is primarily because you did not plan your investments well in your early career. You may have realised by now that accumulating investment assets is a function of your savings habit, and not just based on how much you earn.

The advantage of accumulating assets from an early age is the power of compounding of returns. Suppose you can earn 10 per cent a year on your investments and you need Rs 5 crore to retire by 60. If you are 45, you will have to invest Rs 1.20 lakh a month for the next 15 years to achieve the retirement target. If you are 25, you have to invest just Rs 13,500 for the next 35 years! And if you have to pay-off your student loan, you do not have to invest Rs 13,500 during your initial working years. You can start small and step-up your savings as your income increases and yet achieve your retirement target comfortably.

There is a related advantage. When the investment horizon is long, the required return on investment is lower. That is, if you are able to step-up your investment as you age, you can invest in less risky investments such as bank fixed deposits and still accumulate your retirement value. But if you are already in your late 30s or older and also cash-rich asset-poor, what should you do now?

Asset build-up

As a first step towards creating assets, you should buy a house. This is because house is a leveraged asset. You can borrow money and create the asset. Since you are cash-rich, you should be in a position to pay the mortgage. You can adopt the following test to check your ability to pay the mortgage once you avail it.

Suppose you want to buy a house for Rs 1.5 crore at an interest rate of 12 per cent for 20 years with 20 per cent down payment. Your monthly mortgage payment would amount to Rs 1,32,130. Before you take a loan, open a separate bank account and deposit this amount every month for the next 6 months, as if you have taken the mortgage. You should be able to deposit the amount without difficulty. If you face difficulty in depositing the amount, you should look towards buying a smaller house, assuming you cannot increase your down payment.

There are two other reasons why we recommend you buy a house. For one, you can use the house as collateral to raise money in the case of emergency. You can do this once you have accumulated enough equity in the house. For another, you can reverse-mortgage your house and get cash from a bank to support your post-retirement lifestyle in the event you are unable to accumulate the required money in your retirement account.

Conclusion

Smart professionals more often than not do not set aside time from their busy work schedule to make their investment decisions, ones that can help them achieve financial freedom.

If you are one such professional, it is better to act now than later. Our suggestion to you: Buy a house first and then plan for your retirement.

(The author is the founder of Navera Consulting, a firm that offers wealth-mapping and investor learning solutions. He can be reached at >enhancek@gmail.com )

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