Remember I was telling you last October that even when we had a glimpse of the so much longed for debt finish line we still spent about £5,000 (about $7,500) on doing up the last bathroom in the house that had not been renovated in the last three years and to re-decorate one of the rooms – well, a room that really needed it. It all turned out really lovely; if you don’t believe me have a look at the pictures!
But was it a financially justified and savvy decision? Was this the thing to do when the debt could have been paid off couple of months earlier and, let’s face it, we don’t really desperately need this space? And the time this took and the disruption it caused! John scoured the internet for new bathroom stuff instead of working on his projects; we spent hours matching colours and looking for bed linen; and I can proudly say that for the first time in my life the difference between Venetian and Roman blinds is really clear to me – simple, you put the former in your bathroom and the latter in your bedroom!
It seems like the wrong thing to do at the time, right? Wrong! And this is why: it was all a matter of net-worth. But not a matter of the value of our net worth but of its structure. Let me explain!
Most of the time when people talk about their net worth they mean value. Now, this actually can be a fairly good measure of how wealthy one is; so in the early days of my financial awareness I did calculate our worth. Heck, I was so keen on this one that I developed a tool to calculate net worth (this tool assumes that your net-worth is what will be left behind were you to die today so the value of insurance policies is included).
What did I see? What I saw made me look in the mirror and tell myself the following:
‘Your calculations show that you are relatively well off. How did you find yourself in all this debt then? Are you really that silly or there is something else wrong with you?’
Now, it is never a good sign when I start talking to myself in the mirror – this is usually an early warning of a budding obsession.
In this case, I could not get the matter of our net worth out of my head; I went back to the spreadsheets and looked again. There was my answer!
There was nothing wrong with me; what was/is wrong is the structure of our net worth. Where net-worth is concerned structure trumps value any time! What was (and still is) wrong is that our family net worth shares the two key features of wealth in the UK: it is locked either in property (non-income generating real estate) or in pensions. Which means that all our wealth is ‘dead’ money so it is costing us rather than making money for us!
There has been enough written about how keeping ‘dead’ money impedes wealth building so I am not going to go there. For me, the question was ‘how to change the structure of our net worth so it can start working for us?‘
There are two framework actions that we ought to take, both related to property (it is best to leave the pension funds alone):
- Re-structure property in Bulgaria (largely inherited) so that it generates income; and
- Look at our housing arrangements and see whether some income could be generated there.
Looks simple, you may think, but let me assure you it is far from it. To begin with the property market in Bulgaria, and more specifically in the place where the apartment and house are, leaves much to be desired. Renting these properties out is not realistic – rents are low, tenants are irresponsible and there is no land-lord insurance (apart from paying shady organisations of strong boy with dubious morals for protection and the occasional punitive action). This is why we are off to Sofia this Easter – we will probably need to drop the price substantially but we want it done and completion achieved.
The next problem is what to invest the money in? Buying a property in the mountains? Well, many apartments in skiing area are empty. Buying an apartment in Sofia and renting it out? Rents are getting rather low and the ROI is pitiful. This needs so much more research, thinking and sheer luck. Meanwhile, the money will have to stay in the bank but at least banks in Bulgaria pay 6-7% interest.
Now, let’s refocus on our house. It is not only that most of our wealth (apart from pensions) is in this house; as I have said before when you live in a house that has more bathrooms than people living in it, you know that you have too much house. It is a bit like knowing that your heart rate monitor is for changing when you are running and it shows heart rate of zero.
There are two ways to restructure our wealth and deal with the issue of having too much house and both involve making it pay for itself:
- First, we could release some capital to invest in an apartment to rent by selling this house and buying a smaller, cheaper and not necessarily worse one. This will accelerate our ambitious programme for making £2.5 million in five years so that I wouldn’t have to be employed if I don’t want to. On the negative, this is our home (and, yes, I know this is an emotional argument).
- Second, we could keep the house but rent out part of it (a room and a bathroom). Here is where all this decorating and building work I mentioned at the beginning comes into the picture; this is the ‘method in the madness’ and why it was worth spending on renovations instead of hurrying even further the debt repayment.
We are working towards re-structuring in Bulgaria and keeping our home but renting out the space to part-time visitors. What is the take away?
Knowing how much is your net worth is helpful but could be misleading. Another important aspect of wealth to consider is its structure. Were there to be something wrong with the structure of your wealth be warned: correcting it is like sailing a boat – it takes time and demands considerable foresight and planning.