Tuesday Morning Focal Point

Tuesday Morning Focal Point – February 9, 2016 – Cannot Control What you Don’t Understand Part 2

This continues last week’s topic of not being able to control what we don’t understand. I continue to use the business of “life and living” as an example, with home ownership and property taxation as the more specific tangible example. My thesis remains the same, and that is the fact that many homeowners don’t get it when it comes to home values, taxation, etc. and therefore cannot control what is the most significant investment for them in the business of life, which is their their most important small business.

One of the features in the noon news hour story that I referred to last week, was a focus on a family in Greater Vancouver, complaining because they may not be able to continue to afford the taxes on the home they live in, which has been in the family for multiple generations. Their home is now worth well over two million dollars, and their property taxes are likely going to be around $9,000 this year.  As I listened to the homeowner whine to the news crew, I shook my head as it was evident to me that this person’s financial problems have nothing to do with increased property values or increased taxation, but have everything to do with poor financial management and a low level of financial literacy.

If the home has truly been in the family for multiple generations, then we should assume the home is owned outright and the owner does not carry a mortgage. If this is not true, then we can stop right there, because if multiple generations have not yet paid the home off, clearly this family is not making smart decisions, and the low financial literacy and lack of mastery is being passed on from generation to generation.  Even if multiple generations means a short 40 years, the purchase price on that home 40 years ago, would have been in the neighborhood of $100,000.  So, if it’s not yet paid off, we have a much larger problem.

Assuming the home is paid off and the family has some kind of an income, they should be able to save the required $750 to $800 per month towards their annual property tax bill. Again, if they cannot, they still have a money management problem that his nothing to do with increasing property values and everything to do with low understanding and lack of control.  If, due to some kind of unforeseen recent financial pressures or hardship they need to borrow money to afford the taxes this year, the appreciation over the last year in the value of the home, more than funds not only the taxes, but also funds the interest they would owe as a result of having to borrow in order to pay the tax bill.

If in fact this homeowner truly believes that the skyrocketing value of his home is a problem, then he doesn’t manage his money well, and/or doesn’t understand what the value of the asset is. If truly he cannot afford the taxes, he can sell that home and have such a significant amount of money in his pocket, he could far exceed his current standard of living in perpetuity, and never need to work again.  This becomes a simple choice.  He can stay tied emotionally to the asset to a point where he will never realize the opportunity that exists as a result of the increased value, or he can liquidate the asset and never look back.  If this homeowner would like to know what legitimate hardship is, let’s take him to a market where property values have decreased year on year for several years and consider the tax implications in that market.  In this situation, he may have something…just a little something to whine about.

What is the point? Again, you cannot control what you don’t understand.  Too many people let homes, mortgages; markets etc control them, and never develop enough of an understanding such that they can control these things in their own lives.  Or, they let deep emotional ties; hold them hostage to a particular asset to a point where they are never willing to liquidate.  I don’t for a moment want to diminish the value of an emotional connection to a home or other asset, but if these ties become so strong that they keep us from choosing financial freedom, that is nothing more than a personal choice and no one can be blamed for that.

Next week I will continue this theme with a story about a relative who has learned to control his finances and how learning this control early in life has contributed to success in business. In the meantime, consider the following:

Cameron’s Call to Action

  1. How do your home, its market value and your equity position fit in within your overall financial plan? How will you know when (if ever) it will be time to liquidate your asset and move on? If you have not considered this, take some time to assess your various options and make a determination.
  2. Does your current housing situation and associated expenses fit within your budget and your overall financial plan? If not, it is time to make some changes.
  3. Is your housing situation controlling you, rather than you controlling your housing situation, properly accounting for potential market fluctuations? If so, adjust as required.
  4. Once you understand, take control!