Asset Location

by Tom Tousignant

in Blog, Financial Safety, Refinancing, Wealth Building

Typical Asset Allocation Picture

Many Financial Planners will talk about “Asset Allocation Strategies” as a way to safely grow your net worth.  Asset Allocation strategies sound pretty complicated to me, so I like to look at “Asset Location” first.

What is Asset Location?

Asset Location is having a plan for where you are going to locate your Assets – more simply, where are you going to store your money.  In terms of Start with the House, Asset Location is one of the final steps.  After you have:

  1. Established an Emergency Fund
  2. Paid of Credit Card Debt
  3. gotten the right insurance protection

You need to start thinking about where you are going to put your money.  For too many people, they don’t think about this – they just try to pay off their mortgage as soon as they can.  I have no problem with paying off your mortgage – I do have a problem if you are paying off your mortgage and don’t know why, or if you are paying off your mortgage early and have more important things to do with your money.

Basic Asset Location

How to look at your Asset Location?

You can look at your Asset Location pretty easily.  I divide Asset Location into four basic areas:

  1. Equity in your House
  2. Cash
  3. Retirement Savings
  4. Non-Retirement Savings

So, to do this yourself, add up how much you have in House Equity, Retirement Savings, Cash and non-retirement investments.

To evaluate your Asset Location, you need to consider if the money in each category is

  • Liquid
  • Safe from loss
  • Earning a Rate of Return

Every Asset Class (House Equity, Retirement and Non-Retirement Savings) does better or worse when looked at this way.  For example, Retirement savings should earn a rate of return, but they aren’t normally safe from loss, and they are liquid, but you usually have to pay an income tax  penalty.  Retirement savings end up scoring a 1.5 out of three points.

House Equity, however, fails all three tests – it is not liquid, is not safe from loss, and earns no rate of return!  (Your house may appreciate in value, but the equity in the house doesn’t cause that appreciation, so your equity just sits there…earning nothing).

What to do about your Asset Location

Create a simple chart like I show above for your situation – you can sketch this on a piece of scratch paper using estimates in just a few minutes, then look at what the chart is telling you.

  • Do you have too much of one asset class? Then stop putting money there, or plan to shift some money elsewhere
  • Is the pie too small?  Focus on building the sections of the pie one at a time – Cash, then non-retirement savings, then Retirement savings, finally House Equity.  Two thoughts here – (1) if you get a match on retirement contributions, go ahead and contribute to that plan to be sure to get the free money.  (2) If you own a house, you will build equity anyway as you send in the payment each month, so don’t send in extra unless you have nothing better to do with your money.
  • Do you need to move some money around? Maybe you need to refinance, increase your retirement savings, or focus on building an emergency fund of liquid cash.

If you want to talk about your specific Asset Location, just give me a call at 704-541-1171.

Once your Asset Location is set up right, you will find it is easier to safely keep and grow your wealth so that you can then focus on Asset Allocation Strategies with a financial adviser.

Comments on this entry are closed.

Previous post:

Next post: