Being house-rich and cash poor is a common issue that most homeowners in the United States experience. According to Forbes, many homeowners feel house rich and cash poor, and it may not necessarily be the best situation. This article will cover what being house-rich but cash-poor means and how you avoid this trap.

What it Means to Be House Rich but Cash Poor

House rich and cash poor is a term that describes people that have equity and wealth bound up in their homes and have little to no cash left in their banks. This means you have a home that takes up most of your expenses or budget.

Simply owning a home does not make you rich. A house-rich person spends most of their income on homeownership expenses such as mortgage payments, property taxes, student loans, repairs, and insurance. As a result, you’re left with little or no income to cater for other living expenses, which may lead to frustration.

How Do People Become House Rich and Cash Poor?

Being house-rich or cash poor can sometimes be called being house-poor because you cannot afford to pay your home expenses. There aren’t any specific, clear-cut rules suggest someone is house poor, as the situation can vary from person to person. But purchasing a home you can’t afford by making a large down payment and tying a substantial part of your income to mortgage payments can make you house-poor.

You can also become house poor if your house expenses, like property taxes, increase, and your income remains stagnant. Other factors that may make you house-poor include losing your job, taking an unexpected pay cut, moving from a dual family to a single-family income, and budgeting incorrectly, leading to high house payments.

Is It Bad to Be House Rich but Cash Poor?

Being house-rich and cash poor may not necessarily be good because it can lead to frustrations and anxiety.  All of your assets are tied up in the home itself, leaving little for anything else. Unexpected expenses or financial emergencies will only put you further into debt.

In addition, you may eventually start living paycheck to paycheck and miss out on other social activities like vacations, entertainment, and dining out, affecting your social life and mental health. Also, with a low cash flow, inflation may affect your mortgage payments by reducing your purchasing power, and you may lose your home. The good news is there are ways to improve this situation and avoid being house-poor.

What You Should Do When You Are House Rich but Cash Poor

Being house rich can frustrate you and make you anxious, especially when unexpected expenses arise. Eventually, you may have to increase your income, reduce costs, do both, or consider the following options.

Downsize

Most Americans live beyond their means and purchase homes they may not afford. You don’t have to stay in a large house that will financially drain you. Look for affordable homes, or use your home’s equity to move to an affordable one.

Budget

People have to deeply understand their finances before purchasing a house. Use a home affordability calculator to find how much you will pay for a home before buying one, and create a budget for this expense. Your budget also needs to consider unexpected costs like repairs and other emergencies.

Reduce Discretionary Expenses

If your house expenses increase, you can reduce your discretionary expenses, which are costs that you can do without. For instance, you can reduce spending on vacations, entertainment, fast food, and luxury items you don’t really need to survive.

Find Another Job

Getting a side job increases your income, which may give you the breathing room you need to cover your expenses will still having some discretionary income.

Being house-rich but cash poor is a common problem most homeowners face at least once. It can lead to frustration and affect your well-being. But you can avoid this trap by budgeting, living within your means, and finding ways to increase your income.