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Liquidity is King

Written by: Andrea Travillian

Article Overview: Why you need to balance liquid and non liquid assets

Liquidity is King

Over the years my financial focus has shifted as I have continued my money education. I grab on to a phase and make that the it thing for the time. Everything from real estate is king, to invest early and often to debt free living is the way to go! Usually when I depart a phase that information does not go away, it just gets incorporated into what I know and my emphasis moves on! The older I become and the more I learn about personal finance the more I realize that no matter what financial approach you are going to take the number one most important principal is liquidity. What is liquidity? Liquidity is how quickly you can get your hands on your money for immediate needs. Checking accounts are highly liquid; the value of your business is not liquid. I also add the requirement that the liquidity is present without a penalty being imposed for liquidating. This would be the case with retirement accounts, CD's and some other investments. You may have a million in a money market account, but if it is under the umbrella of an IRA and will cost you a penalty to the IRS to get at it, then I do not consider that liquid. Debt is also not liquidity, because ultimately debt will decrease your future liquidity by creating payments and extra expenses in the form of interest. We are talking about cold hearted cash that you can get your hands on is liquidity.

Why do you want to be liquid? Liquidity gives you flexibility which allows you to create independence and freedom. How? Imagine all the times that having money available would have allowed you the ability to move on an opportunity that has been presented. For example during a recession your competitor is about to go under and you can step in and buy them or their equipment. You start a new business and because you have cash you can take longer to build your base and find the right customers versus operating in panic mode and going back to make adjustments latter. You at the last minute are offered a vacation spot with your friends because of a cancellation and you have the cash to do it and enjoy it!

Outside of winning the lottery and sticking all that money in savings how do you create liquidity? There are three basics to follow: live on less than you make, diversify your types of assets and learn to say no to good opportunities.

The first step is to live on less than you make. This is one of those things that you hear over and over but rarely actually listen to the advice and take steps to follow through. Please take the time to stop right now and process this statement in your head. It will help you with more than just financial liquidity. It reduces stress, creates money for investing and allows you to take full control of your financial destiny. Sit down and do a budget and start focusing on eliminating expenses or creating income until you are spending less than you bring in. Then begin to put that extra money into liquid accounts for you to access when needed. This concept should apply to you and your business. If you don't do this on the business side you are not making a profit, and at that point you might as go work for someone else!

The second step is to diversify your assets. What I mean by this is don't put all your money in retirement accounts, or real estate or even just a savings account. Your money needs to be divided among different assets with varying degrees of liquidity. This is beneficial because it not only creates a place for liquid savings, but encourages you to put away in non-liquid investments such as retirement thus creating more permanent long term wealth at the same time you create liquidity. If the perfect real estate deal comes along you don't want to have all your money in retirement. If your goal is to save 15% of your income, break that 15% down to 10% retirement accounts, and 5% non retirement investments.

The third thing to do is learn to say no! Just because you come across a fantastic deal does not mean it is a fantastic deal for you as your situation stands today. This is a really hard one to put into practice because we all tend to want to get a great deal and then brag about it! However if that great real estate deal that you get to brag about is going to jeopardize your liquidity and wealth then it is not worth doing. Why, because life is unpredictable. You may believe you can make the extra payments for a year and then you will get a raise, land a new client or sell your old place and then all will be back to the right balance. What if that is not true? You cannot guarantee that a future event will happen today. Basing current decisions on what might happen tomorrow is not a good way to make good financial moves. Only seize opportunities if it is completely right for you today, based on today's situation. Say no with the confidence that it will put you further ahead and when YOUR right deal comes along it will be even better and easier to enjoy.

Freedom comes from having choices, allowing yourself liquidity creates choices. Don't box yourself in a corner, give yourself freedom. It is easy by living on less than you make, allocating your assets across many areas, and learning when to say no! You can do this and reap the rewards of good financial choices!

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Article Tags: liquid assets, liquidity, non liquid assets, why you need liquidity
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