Once one becomes financially independent and in a position of comfort, it’s easy to assume that person will remain in that financial situation. However, that’s not always the case. It’s why every person, regardless of their current financial situation, should understand how money truly works. The December 15, 2015 issue of the New York Times’ article “Reversal of Fortunes for Some Superrich,” explains that just because you are rich doesn’t mean you are immune from losing your wealth. There is still the possibility that you could lose your wealth, whether from poor financial decisions or outside sources.

If you’re one of those very fortunate people who have the wealth to live the way they want now, it’s important to make sure you can preserve that wealth so that, in the future, you don’t lose it because of poor financial decisions. You want to be able to sustain — and hopefully even improve upon — the lifestyle you’ve grown accustomed to and enjoy.  But in order to do so, one must understand how money works — not just spending and saving. For example, a couple I met back in the nineties had about ten million dollars’ worth of real estate from which they were getting dependable rental income cash flow. They lived pretty simple lives and weren’t outlandish in their spending. But there was an unanticipated change in the economy in their area, and all of a sudden there were vacancies in their buildings, which meant that their cash flow suddenly shrank. Even though they owned all of their real estate free and clear, without debt, instead of it making positive cash flow, they were now paying for their holdings out of pocket. Why? They still had to pay for maintenance, real estate taxes, and other operational expenses, all of which cut deeply into their income just as they were approaching retirement age.  Not surprisingly, at that point they panicked; they made some bad choices and got behind on their real estate taxes. Suddenly they were looking at a scenario in which they’d be forced to sell their properties in a down market, which would put them into a downward financial spiral of less and less income.

By the time they came to me, we had to make some fairly drastic decisions. We looked at what they had and what they’d have to do with their properties to get themselves out of this situation. There were some properties they owned that, even in good times, weren’t good cash flow producers, but they held on to them for personal reasons. That kind of thinking isn’t helpful when you’re trying to build cash flow. Bad real estate is like a bad stock. When the market goes down, if you’re in a bad stock, you’d better sell it. There was some real estate they had to let go. When they did that, their cash flow improved because they were not stuck throwing money at bad properties. When their cash flow improved, we were able to go to a bank and show the bank that they were taking steps to improve cash flow. The bank decided that now they were a better risk, so it gave them some short-term borrowing ability. The borrowing allowed them to fix up properties to attract better tenants and to pay their expenses, so they didn’t lose the buildings.  Then, as the market improved, they were able to take some of the excess cash flow, pay off their debt, and finally diversify into other assets. Even though it took a few years and they weren’t able to keep all their property, the property and investments they had left were good, and they were able to get back on track and live the life they wanted to lead.

For more information about making the wisest financial decisions for your life, visit  tswealth.com.