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To be "cash poor" means you have your wealth tied up in assets you can't easily convert to cash. Somebody who's cash poor may consistently be short on money and may struggle to pay for the things they need or want, despite having substantial money in assets.
Finding yourself cash poor is not only stressful, but it carries real financial risks. For example, being cash poor may mean you don't have an emergency fund, which can put you in the position of not being able to financially cover a crisis. Here's how to tell if you're cash poor, how to work your way out of it and how to avoid it in the future.
What Does It Mean to Be Cash Poor?
Being cash poor means that you have money in the form of assets, but you don't have much liquid money in cash or in your checking and savings accounts.
Cash poor is also sometimes referred to as "asset rich, cash poor." Assets are anything you own that has economic value, and can include physical forms of wealth such as real estate or fine art, or financial assets such as stocks and bonds.
Having considerable wealth in assets is a good thing. Assets add to your net worth, may appreciate with time and can be converted into cash (liquidated) to help you achieve financial goals such as having more money for retirement or paying off debt.
The issue with having a large percentage of your money tied up in assets is that it can be challenging to access your cash when you need it—more on this below. Even moderately liquid assets, such as stocks and mutual funds, can pose a cash flow problem if you need access to money during a market downturn.
Examples of Being Cash Poor
There are many factors that can lead to being cash poor. Here are some examples of what it can look like:
- You have a lot of home equity, or own your home outright, but you struggle to afford expenses such as utilities, taxes or HOA dues and can't afford home improvements or repairs.
- You've invested much of your money in assets such as stocks or real estate, but you have no money in your emergency fund.
- In an effort to retire early, you're funneling a high percentage of each paycheck into your 401(k). As a result, you feel chronically strapped for cash.
Risks of Being Cash Poor
Being cash poor comes with certain risks. Even with substantial cash in assets, someone without enough spendable money might struggle to budget. They may even feel as though they're living paycheck-to-paycheck. As a result, it can feel impossible to set and achieve long-term financial goals.
Here are some risks of living asset rich, cash poor:
- Not having enough money (around three to six months' worth of necessary expenses) set aside to cover your expenses in your emergency fund. Because you can't predict what future economic conditions will be, you shouldn't rely on your ability to liquidate assets in an emergency.
- Struggling to pay your bills on time, pay for large expenses or meet other financial obligations, even if you own your home outright.
- Feeling forced to make disadvantageous investing moves, such as selling stocks when share prices are down and taking a loss because you need the money to cover an emergency auto or home repair.
- Feeling burnt out by a budget that's too hard to stick with, which can ultimately lead to overspending.
How to Avoid Becoming Cash Poor
These financial wellness tips can help you avoid the cash flow problems that arise when too much of your money is tied up in long-term assets:
- Accurately estimate your expenses. Underestimating your expenses can leave you short on funds. Review your actual spending against what you budgeted and find the difference. Then adjust your spending plan to find a balance between setting spending limits and creating a budget you can stick to.
- Balance saving, investing and spending. Investing a comfortable portion of your paycheck into a 401(k) or IRA can help you reach your retirement goals. But being too ambitious with your contributions can cause you to deplete your short-term savings and struggle to get by.
- Know how much home you can afford. "House rich, cash poor," sometimes called simply "house poor," is when your housing expenses monopolize a large portion of your income and leave you with little left to budget each month. Research the costs associated with homeownership and get an idea of what price range makes sense for your income before you buy.
What to Do When You're Asset Rich, Cash Poor
- Audit your cash flow. Get a clear view of your income and your monthly spending. How much money do you make each month, and how much goes toward necessities, saving, investing and discretionary spending?
- Cut back. Look for places where you can reduce your expenses. You may be able to lower your auto insurance or utility bills, cancel unneeded subscriptions or cut back on dining out, for example. Your goal is to free up cash while you get back on track, so consider these sacrifices a temporary measure.
- Build an emergency fund. If you don't already have an emergency fund, open a savings account and begin directing a portion of each paycheck into it. You can also direct any windfalls (such as your tax refund) into the fund to build it faster.
- Increase your income. Finding ways to boost your income can give you more cash to work with as you cover your expenses and build your savings. Asking for a raise or starting a side hustle are two possibilities.
- Consider selling assets. If you have investments that could reap good returns, consider whether selling them would benefit you. This could mean selling stocks or real estate. It could also mean downsizing your home or tapping into equity.
- Talk to a financial advisor. If you have money tied up in various investments, you may be unsure how best to proceed. A financial advisor can help you clarify your priorities and devise an exit strategy that minimizes loss, accounts for taxes and supports your big-picture financial goals.
Find the Right Balance
Being asset rich but cash poor is a risky financial position because an unexpected expense can derail your finances. Balancing investing and saving, sticking with a budget and building an emergency fund can help you avoid becoming cash poor. If you're already asset rich, cash poor, you can look for ways to leverage the wealth you already have to improve your full financial picture. A financial advisor may be able to help you evaluate your options.
In addition to monitoring all aspects of your finances to achieve balance, you can monitor your credit for free through Experian to view updates to your credit score and report and learn about ways to increase your score. You'll even get suggestions on how to do more with your score, such as lower your insurance rates or consolidate debt, which could put you in a better cash position.