Feeling cash poor causes stress that often leads to people making hurried and flawed decisions. Having sufficient liquidity helps reduce those feelings of financial stress. When people know they can manage unexpected emergencies and expenses, they feel more at ease. That makes liquidity a crucial part of both personal and business finance as both individuals and businesses who know they have cash available can work through money issues more rationally.
So how is liquidity defined, and what are some of the advantages that come from having enough cash on hand? Liquidity is the ability to access cash or assets quickly and without a penalty. It’s important to note that liquidity doesn’t necessarily mean holding cash in a checking or savings account. It can also include assets that can be easily sold and converted into cash, such as stocks and bonds. While it’s important to balance liquidity with other financial goals, such as long-term investments and retirement savings, including liquid assets within an investment portfolio is key to a well-designed financial plan. Even when a person has substantial assets or investments, if not enough of those assets are easily accessible it can lead to increased stress levels and poor decision-making.
In the Elements Financial Monitoring System, the Liquid Term (Lt) ratio is used to measure a person’s liquidity as part of their financial vital signs. Liquid Term shows the percentage of assets that are easily accessible and allows advisors to quickly illustrate to their clients why there is a need for liquid assets as part of a well-balanced portfolio.