7 Smart Strategies to Manage Your Finances When You're House Rich Cash Poor
Being “house rich cash poor” isn't a good situation. Having a big house doesn't make you a better person, and it could cause serious financial destruction that you didn't plan for when you looked at houses.
Credit card debt, unpaid bills, and financial stress are just the start of what could happen if you are house-rich but cash poor.
What Does It Mean to Be House Rich Cash Poor?
You can end up house rich cash poor in a couple of ways. Either way, when you're cash poor, it can be difficult to afford your bills and living expenses, causing arguments and financial strain in your marriage.
Here's how you can become cash poor but house rich:
Investing all or most of your capital in your house - This leaves you without any cash for things like your mortgage payments, maintenance and repairs, and other bills
Buying a house you can't afford - Purchasing a house with a high mortgage payment can make it hard to stay ahead financially, making you cash-poor and causing financial strain
Is It Bad To Be House Rich Cash Poor?
Not having enough cash can be scary. The financial trouble it causes can be detrimental to your mental health, marriage, and, of course, your finances.
Even if you have a lot of equity tied up in your house (i.e. your home’s value is higher than your remaining mortgage principal), you can't access it very easily, making it hard to manage your monthly budget.
Causes of the House Rich Cash Poor Dilemma
So what causes most people to become house rich cash poor? Here are the top reasons.
Increasing Property Values
High property values don't automatically mean you are rich. Sure, the higher property values increase your home equity, but again, you can't access it easily. Higher property values could also mean higher property taxes
You may qualify for a home equity loan, but that wouldn't necessarily help your cash-poor situation as much as you would think since it would increase your monthly debts, requiring more money each month to cover your bills.
Stagnant Income Growth
As living expenses increase, life becomes more expensive. However, if your income doesn't increase and keep pace with inflation, it can become harder to afford your mortgage payment and other expenses.
When you qualify for a mortgage, they use your gross (not net) income to determine your debt-to-income ratio. This can be deceiving and put you into a mortgage payment you can't easily afford.
High Cost of Living
If you purchase a house in an area with high expenses, you may not consider it when applying for a mortgage. All you know is you found a house you loved and bought it.
Once it's yours, you realize it's not the valuable asset you assumed because the cost to maintain it or even pay the utilities greatly increases its cost, not to mention the basic cost of living in the area for you and your family.
Mortgage Debt Burden
Your mortgage payments are required monthly. They might have seemed affordable on paper, but as you live life, you may realize they are harder to afford than you thought.
This is an even higher risk if you have an adjustable-rate mortgage loan whose rate can increase over time.
The Impact of Being House Rich and Cash Poor on Your Finances
Being cash-poor means you don't have enough money to cover your bills or regular expenses. Being cash-poor house rich can cause many issues, including:
Financial struggles - Not knowing how to make ends meet can be stressful. The financial strain can be debilitating if you have unexpected costs or don't realize that the large down payment you made would deplete your cash reserves and make it hard to stay afloat.
Limited cash flow - Not having adequate cash causes stress with discretionary spending and even meeting your required expenses. Wondering if you'll make ends meet monthly can damage your mental health and relationships.
Equity vs. liquidity - Liquid assets are those you can cash in instantly and receive cash. A house doesn't offer that option. While you could sell it, the process could take months, and you'd have nowhere to live. Equity is great on paper and for long-term goals, but if it makes you cash-poor, it can cause financial difficulties.
Budget constraints - A large mortgage loan puts constraints on your budget. You may have to sacrifice in other areas, causing stress in the marriage.
Strategies to Manage Your Finances When You're Already House Rich Cash Poor
If you're already house rich cash poor, here are some strategies to help you manage your finances and get back on track.
Evaluate Your Expenses and Create a Budget
A monthly budget is necessary, especially if you're house rich cash poor. Evaluate your income and expenses and decide where to cut back to make ends meet.
You may find more areas than you thought possible to save significant money.
Explore Refinancing and Loan Options
If you have a high mortgage payment, consider looking at refinancing options. You may find a loan with a more affordable monthly mortgage payment.
This is often the case when you can refinance into a shorter-term loan or reduce your interest rate.
Rent Out a Portion of Your Property
Side income is a great way to get help with your housing costs without any extra work from you.
If you have an extra room or a finished basement, you can rent it to tenants and use the money to help with the housing expenses.
Consider Downsizing or Selling Unused Assets
If you have unused assets, consider selling them. This will free up some capital, and if you properly budget, it can help make your monthly payments more affordable.
If you don't have assets to sell, or they aren't enough to help with your debt situation, consider downsizing. It may take a few months to sell your house and buy another, but buying a house you can afford will eliminate the cash-poor situation.
Generate Passive Income Streams
Passive income streams are another great way to increase your gross income and have enough money to cover your monthly mortgage payments, other debts, and living costs.
Passive income can come from investments or things like:
Starting a blog
Writing an e-book
Teaching an online course
Selling stock photography
Develop Money-Saving Habits
Using your monthly gross income appropriately can help avoid a cash-poor situation. This includes learning to save money.
Be sure your budget includes ways to save automatically, making savings non-negotiable. This may require finding areas to reduce expenses or find more affordable services.
Build an Emergency Fund
An emergency fund helps with unexpected costs. As a homeowner, you're responsible for your home's maintenance and repairs. Homeowners insurance only helps with disasters like weather or fire; everything else is your responsibility.
One house emergency can make you instantly cash-poor, but having an emergency fund saved can prevent this from happening, providing enough money to cover the emergency and your bills.
Seek Professional Financial Advice and Assistance
If you are house poor and don't see a way out, consider financial coaching or advice from a mortgage professional.
Talking to a professional can give you a different view of your situation and can help you understand the ways to turn it around, including refinancing, downsizing, or restructuring your budget.
How To Avoid Being House Rich Cash Poor In the Future
The key to proper financial planning is preventing situations like becoming house rich cash poor. Here are some simple strategies to start today.
Create a Realistic Budget and Stick to It
Live below your means, and make sure you stick to the budget you set.
It's easy to overspend, but to overcome it is challenging, especially when it affects your budget for many months in a row. Getting ahead may feel impossible, so sticking to a budget is the key.
Consider the Total Cost of Homeownership
Many people overlook the total cost of homeownership. Beyond the mortgage payment, you must pay property taxes, homeowners insurance, and the costs to maintain and repair the home.
These costs can greatly increase the total cost of homeownership and often catch new homeowners off guard.
Don't Overspend on Your Mortgage
On paper, you may qualify for more than you can realistically afford. Before accepting a new mortgage, see how the payments fit into your budget.
If you're stretching it, reconsider the purchase, and either look for a lower-cost home that you can afford easily, or wait until you have a larger down payment saved.
Be Mindful of Other Financial Obligations
Your mortgage is only one part of your monthly payments. Consider all other debt you carry or financial obligations that would make affording the mortgage difficult.
Keep your mortgage within the limits of what you can afford, no matter what a mortgage professional says you qualify for.
Prioritize Debt Repayment
Many homeowners qualify for a mortgage with existing debt but fail to realize how difficult it is to pay off the debt and handle the mortgage payment.
Before buying a home, consider repaying the debt first.
Plan for Future Expenses and Unexpected Events
Unexpected things will happen in life, no matter how well you plan.
Having an emergency fund with liquid cash will help you afford unexpected events and expenses and help you avoid a financial disaster.
FAQs
What Is Considered House Poor?
You are house poor when most or all of your assets are from the value of your house, and you have little to no liquid assets besides the home. Because a house isn't liquid, this can cause financial strain.
Why Do People Find Themselves in a House Rich Cash Poor Situation?
Many people find themselves in a house rich cash poor situation because they bought more house than they could afford. Mortgage lenders often use your gross income to determine how much mortgage you qualify for, but your gross income isn't the amount you bring home. After taxes and other deductions, such as retirement funds, you may have much less to work with, leaving you with little cash but a valuable house.
What Are the Risks of Being House Rich and Cash Poor?
When you are house rich cash poor, you may have a hard time affording regular bills. If all your money goes to your mortgage or keeping up the house, you may not have many liquid assets to cover your other costs, not to mention emergencies.
Should I Sell My Property to Improve My Financial Situation?
Every homeowner must decide what is right, but sometimes downsizing and getting a lower mortgage payment makes sense. To decide if it's right for you, talk to a financial professional to see how the situation would work best.
How Can I Generate Additional Income if I’m House Rich and Cash Poor?
If you're house rich cash poor, consider taking on a second job or starting a side hustle. You could also consider investing in low-risk ETFs or other passive investments to get more money to help you afford your bills.
The Bottom Line
Try to avoid becoming house rich cash poor in the first place. First-time homebuyers are at the highest risk, but anyone can end up with a mortgage on their primary residence that they can't comfortably afford.
Take the steps necessary to avoid the situation, and if you end up in one, consider financial coaching to strategize your way out.
Want to level up your game around money in your relationship? My free quiz will help you learn your Couple’s Money Personality Type AND how you can grow from there!
Adam Kol is The Couples Financial Coach. He helps couples go from financial overwhelm or fighting to clarity, teamwork, and peace of mind.
Adam is a Certified Financial Therapist-I™, Certified Mediator, and Tax Attorney with a Duke Law degree and a Master's in Tax Law from NYU. He is a husband, dad, and musician, as well.
Adam's wisdom has been shared with The Wall Street Journal, the Baltimore Ravens, CNBC, NewsNation, and more.
