Financial Wisdom for Women Over 50: Understanding Liquidity

By Sherry Finkel Murphy

If I had a dollar for every time a woman tells me she’s scrambling to free up cash. I teach women about money so they can make the best financial decisions with knowledge and confidence. My job is to address the stress (OMG, the stress!) we place on ourselves when we don’t understand how to act intentionally with our money, whether we have a little of it or a lot. We need knowledge of money mechanics and financial planning best practices.

Madrina Molly: Financial Wisdom for Women of a Certain Age(ncy)

I founded Madrina Molly to give women the education they deserve but aren’t receiving from the financial industry. Over the next few months, I’ll be addressing concepts that will open your eyes and make it much easier to determine how to manage (and grow) your wealth.

Liquidity

I last wrote about time horizon and how to think about where you put your money based on when you will need it to spend. Liquidity is a related concept that refers to how quickly any instrument can be turned into cash.

Savings and checking accounts are highly liquid in that they contain cash and do not require conversion. You can access the cash directly via debit card or ATM. Real estate, private equity, and shares in a closely held business are illiquid and difficult to turn into cash quickly. Corporate bonds, stocks, and mutual funds are somewhere in the middle in that they may have a short time lag or a cost to be rendered liquid.

In short, liquidity is how quickly you can access your money as cash. It’s important because, sometimes, being illiquid is as painful as being poor. After all, you can’t eat a gold bar. You need to time your liquidity to match your time horizon.

Best Practice

As a rule, highly liquid assets (cash, money market funds) pay a lower return than less-liquid assets (private equity, collectibles, real estate). This is by design. Other characteristics of liquidity would be having an easy market in which to buy and sell (convert to cash) and having the ability to exchange the asset for cash with little price impact or transaction fee.

I know that seems basic, but people forget that they can’t just break a certificate of deposit without paying a penalty (usually forfeited interest), or sell a stock in a down market without taking a loss.

It’s important to maintain a certain level of liquidity for four purposes: expenses, emergencies, planned spending, and opportunities.

Expenses

I can’t think of a person who hasn’t experienced this at one time or another—carefully timing the payment of bills for when the paycheck arrives. That’s liquidity at work.

You need enough in the checking account at the right time to cover expenses. Too little, and you bounce checks; too much, and your money is not keeping up with inflation.

Emergencies

Everyone needs an emergency fund. Best practice is three to six months of expenses in a high-yield savings account.

As a backup, lines of credit against hard assets, such as HELOCs (Home Equity) and margin lines (brokerage assets), also provide liquidity—but at the cost of interest.

People who feel secure in their income/employment may keep a balance at the low end of an emergency fund. People who feel their income is at risk should hold more liquid assets for emergencies.

Planned Spending

Whether it’s a bucket for the next vacation, veterinary expenses, the kitchen renovation, or the “Forget You Fund,” you’ll need liquidity for things that are not expenses (within 30 days) and are not emergencies (you’ll know it when you see it).

You’ll want all short-term planned events to have their own buckets. While you may co-mingle them, do NOT combine them with your emergency fund lest you are sorry when a real emergency comes along.

Opportunity

You’ll want liquidity in the stock market to buy on sale. You’ll want liquidity in the real estate market to put a downpayment on a home.

The amount of liquidity you keep for opportunities is personal. Not everyone likes to jump. But certainly, everyone likes to feel they’ve gotten a good deal when they do decide to jump. And that requires ready cash on hand.

Summary

In personal finance, liquidity matters because it’s the key to your flexibility in good times and bad. By keeping just the right amount of cash or near-cash on hand, you will always be able to pay expenses, handle emergencies, and leverage opportunities when you see them.

Be intentional with your liquidity needs, and you’ll always have cash when you need it.