Liquidity and How It Should Work For You
There are two categories of money that we all have, liquid and non-liquid. (Kind of like there are two kinds of people, male and non-male.) How liquid an asset is depends on how quickly you can convert it into cash. A checking account: very liquid. Your baseball card collection from when you were a kid: not very liquid (and not very valuable). Your non-liquid assets are tied up in your 401K, your Roth IRA and your traditional IRA and are invested in mutual funds, bonds, CDs and stocks. If you’ve invested wisely, you’re earning a premium rate of return on those investments and you have no need of touching them. As Ron Popeil might say, “Invest it and forget it.” Our concern here is the liquid portion of your assets and what you should consider in their management.
Investment potential. Part of any investment strategy should be your liquid assets. Finding a good opportunity for investment could come at any moment. Having spare cash around is key for when major indexes drop in value so that you have the resources to buy low. All the investment savvy in the world means nothing if you don’t have the resources to invest.
Emergency spending. Your liquid assets are also hedges against a downturn in your personal economy. (Meaning you lose your job.) Having wealth that is easily convertible into cash is an indispensable safety net. Even though you might not be earning much of a return, there is considerable value in the peace of mind knowing you can live comfortably for four months without a job.
Access. Of course, that safety net means nothing if you can’t get at your money for three months. Short-term investments (3-6 months) are tempting so that you can earn a better return. (Simple rule of thought – the more liquid, the lower the return. So a 3-month CD should earn a greater return than a simple savings account.) If you need the money tomorrow and it isn’t available until August, you’ll be in a bit of a pickle. (Or would it be a jam? Either way, it sounds bad but delicious.) If you have a level of liquidity that you feel makes you comfortable for 3 months, buy that CD with the remaining funds. Otherwise, think of the value of being able to possibly invest in something with a higher rate of return or as security to offset your money’s current low rate of return. Which brings up two additional points in access.
Fees. Do you have to pay to write a check or use an ATM? Is there a minimum balance requirement that if you don’t meet, it’s a large monthly fee? Even if you get a rate of return for your liquid assets, be sure to examine the likelihood of any possible fees. With the rate of return so low, any fee could eat your returns like a pickle. Or some jam. Whatever.
Convenience. As a credit union member whose credit union only has a couple of branches and the nearest one is over 1,800 miles away, convenience is key. Fortunately, the credit union network has thousands of ATMs across the country that can be used to withdraw and deposit money without any fees. However, if I wasn’t close to any of these locations and I had to pay a dollar every time I accessed my account or drive an hour or stand in line at the grocery store to get money, the value of my account would quickly dwindle.
Return. Lastly, if you’ve minimized fees with maximized access and convenience, it’s time to look at return. Now, you can start thinking of opening a combination savings/checking account that allows transfers between the accounts or just a checking account with a rate of return. (Good luck with that, but I would recommend checking your credit union, just in case.) Figure out a monthly budget and move the money from savings at the beginning of the month and let the rest of your money be deposited in savings and sit in savings to earn your return. If an emergency happens, and there are a limited number of transactions, you still have those transactions for the rest of the month.
At that point, you should have security (which has a value through your peace of mine), a hedge against a downturn in investment vehicles and a rate of return, albeit a small one, to go with your no fee, convenient account. Which, when you add it all up, is actually quite valuable.
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About Jason McClain Jason is an aspiring novelist, which means there is a lot of time to put off writing and watch baseball or go fly-fishing, hiking and traveling. By "a lot of time", Jason means "procrastination."