The Difference between Capital and Disposable Income

In other words looking after your money (capital) and spending the cash.

An aging client recently called me to say that she wished to sell her commercial buildings which had been netting her around $40,000 for many years. That, on top of her pension would make a single 70+ woman quite well off.

On further discussion it became apparent that her accountant is suggesting she should sell and spend the money, the capital that is.

With an 8% capitalisation rate, the building is probably worth say $500,000

$500,000 divided by $40,000 spending per annum = 12 and a bit years

Based on that calculation, at age 82 and a bit, she is out of money!

Would she not be better to hold the buildings, even if she had to pay a property manager because the $40,000 pa would continue on?

The same applies to the sale of land. All land, whether it goes to offshore purchasers or other New Zealand farmers. You sell the property and the income flow ceases. You have a sum of capital or cash in the bank, but you have no cash flow and because you do not understand money, you start spending the cash. A house in town, a world trip, a bit for each child and a new car you have always wanted, and suddenly the fat nest egg is looking like a few straws in the bottom of the nesting box.

The thrust of this argument or story is that we must identify the difference between capital and cash-flow. Capital is what you invest to create cash flow. Cash flow should really only be spent to try and protect your capital for future cash flow.

I then pondered on who is, and who should be advising people on how to manage their assets and capital vs cash flow.

We have all these new regulations in place, but the fact remains that many advisors (some Accountants and Solicitors included) are not working towards protecting capital assets for cash flow for their clients.

The Institute of Directors is lifting its game and trying to get higher standards and registration in place for its members to give the public more qualified support. It would therefore seem to me that there needs to be a profession who act as Trustees and professional advisors to assist the public to hold and manage assets to provide cash flow for their clients and not take the soft option of cashing up and putting the money in the bank where it will depreciate, and also allow the clients to spend capital too.

In summary

My concern is that many people, including farmers are great at managing their businesses, but as soon as the asset is sold they become confused with all the cash in the bank and how to manage it. It seems to me that that there is a lack of understanding and professional support around the necessity to protect as much capital as possible for the production of disposable income for their future.


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