Cash is King: Understanding Liquidity and How to Create More

cash is kingOver 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 – otherwise known as have access to cold hard cash!

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.  Penalties might be applied with accounts such as: 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 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 hard cash that you can get your hands.

Why Do You Want to be Liquid (AKA: Having Cash on Hand)?

Liquidity gives you the flexibility to create independence, freedom and deal with the crap life throws at you.

How?  Imagine all the times that having money available would have allowed you the ability to cease an opportunity.

Here are some examples of when cash would have been handy:

  • 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 find yourself out of a job due to layoffs and you have the money to find the right job, not just a job.
  • Or on the happy side at the last minute you are offered a vacation opportunity with your friends 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?  (Which by the way, you have a better chance of getting hit by lightning than winning that big lottery.)

There are three basics to follow for creating extra cash in your life: live on less than you make, diversify your types of assets and learn to say no to good opportunities.

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 you can begin to put that extra money into liquid accounts for you to access when needed, this is also known as an emergency saving account.

If you are a business owner this concept also applies to your business.  If you don’t have a balanced budget on the business side you are not making a profit, and at that point you might as go work for someone else (unless you are in start-up mode).

Need to Learn How to Budget?  Check out my Budget Ebook


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.

Learn to Say No!

Just because you come across a fantastic deal does not mean it is a fantastic deal for you today.   (Click to Tweet)

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 cash flow 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 they are right for you today, based on today’s situation.  Some may say this is avoiding risk and you can only get rich by taking risk, but when you are investing to grow wealth you need risk that is manageable; you want to know what the risks are – you don’t want to jump off the cliff.

Getting rid of common sense and logic because you think you need risk to get rich hurts more than it helps.  When you jump at opportunities that are not good for you now, you open up the possibility of adding risk that you could avoid. 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, by having cash on hand you allow yourself the opportunity to have more choices.

Johnny Ventis says March 3, 2014

This is not so true during these BOOMING economic times we are in now. Home values up 20% yearly, Ebay Auction prices up 20%/yearly, Stock market at all time highs, 19 billion dollar app purchases. If you have cash now it is absolutely worthless. You can buy a $5 hamburger if the restaurant even excepts cash. Inflation is running rampant…. If you haven’t invested you are screwed. Back when you wrote this article in 2010 this might of been true but a lot has changed in the last three years and cash is now meaningless.

    Andrea says March 4, 2014

    @Johnny – there is always a place for cash – it is never meaningless. Even if it is buffer for when stuff happens – and stuff will happen. It is not about having it all in cash, but having some cash and liquidity to take advantage of opportunities and deal with hardships. Inflation is actually in line with the past, only some sectors are growing faster.

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