360 Private Wealth Management’s Natural Wealth® Process: Possession Wealth
The Natural Wealth® Process divides household wealth into three categories: Person Wealth, Portfolio Wealth, and Possession Wealth. In January our focus was Person Wealth, February was a review of Portfolio Wealth, and at the end of the first quarter of the year we highlight Possession Wealth.
Possession Wealth is, quite simply stated, our possessions. Our possessions include our house or condo, and if applicable, a cottage (camp) or Sun Belt property. Also included in our Possession Wealth are our vehicle(s), boat(s) or other recreational vehicles, household furniture, and any other actual items of value including collectibles.
The important thing to realize about Possession Wealth is that, generally speaking, possessions require income from Person Wealth, capital and/or income from Portfolio Wealth, or new debt in order to buy and maintain. With the exception of houses, condos, cottages, some Sun Belt properties, and some collectibles, most Possession Wealth items depreciate rather than appreciate over time.
In reality, even real estate and collectibles can decline in value in certain economic climates. In Canada, we have become accustomed to ever increasing real estate values over the last several generations in many geographic areas, however many Americans saw their homes decline measurably in value during the 2007-2009 recession. It can happen here too. The International Monetary Fund and other global financial watchdog organizations have identified Canadian residential real estate (particularly in Toronto and Vancouver) to be in a danger zone as far as valuations are concerned.
In order for a personal real estate asset to preserve its value it must be maintained and updated on an ongoing basis with upgrades and renovations. This requires income from employment or investment assets to accomplish. Real estate properties can ultimately be sold with the proceeds of sale converted to Portfolio Wealth.
As for vehicles and other non-property Possession Wealth items, we essentially “use them up” overtime and then replace them as “needed” (or wanted?). Although acquiring Possessions is not bad per se, buying and owning things without a well thought out purpose simply because you can, might be . . .
I think we can all share stories about our basements, garages, and sheds becoming resting places for possessions we once thought were indispensable. While a lot of those items could likely be sold, gifted, or thrown out . . . we should be aware of the overall cost to buy and own those objects.
Be mindful when considering the purchase of a new possession, whether a house, cottage, car, or any other possession. Try to project yourself into the future and ask yourself the following questions:
- Where will this purchase leave me in 5 years, 10 years or even further out? Will it still be relevant?
- What would the money invested (to buy AND maintain the purchased possession) grow to during that time?
- Will I have enough portfolio wealth in the future (based on the current growth trajectory) to maintain my lifestyle when I am no longer working? Or, if I am currently no longer working, will the purchase and upkeep costs of the possession I am contemplating impede other lifestyle expenditures?
Test yourself in advance; it is a worthwhile exercise. If a contemplated purchase passes the above test then make the purchase and enjoy the possession to the fullest extent possible.
If you want to discuss a possession purchase in terms of your overall financial life plan please do not hesitate to contact us. We can discuss the upcoming purchase you are considering and, if appropriate, help you map out any consequences in terms of the bigger household financial life planning picture. To keep track of your current Possession Wealth please see our attached Possession Wealth Worksheet.
David J. Luke, CFP, RFP, CLU, CH.F.C., CIM | Financial Advisor
360 Private Wealth Management | Manulife Wealth Inc.
Unit 1 – 25 Scurfield Boulevard, Winnipeg, MB R3Y 1G4
Main Office 204.925.5868 | Direct 204.925.2073| Fax 204.925.2263 | Toll Free 844.688.3656