Maintaining a healthy ratio between liquid and illiquid assets is one of the most important aspects of long-term financial planning. Liquidity refers to the accessibility of the asset or how quickly and easily can the asset be turned to cash without significantly losing its value? Finding the right balance between the two is key to meeting short-term obligations while achieving long-term financial goals. Liquid assets include cash, checking & savings accounts, money market funds, stocks, and bonds, which can be quickly accessed with minimum loss of value and provide flexibility to respond to last-minute changes. Illiquid assets include real estate, private equity, collectibles, and business ownership. These types of assets may offer potential for growth, but they are more difficult to liquidate, or convert to cash quickly, especially in times of need.
Preserving a strong level of liquid assets is crucial to creating and maintaining a durable financial plan. Emergencies, as well as opportunities, tend to arise without much notice. Whether an unexpected medical bill, investment in a new business venture, urgent car repair, or dream beach house, we want our clients to be properly positioned to make the best choice for them. Having accessible funds can mean the difference between staying financially stable and taking on more debt or missing out on opportunities. Additionally, financial markets tend to be volatile. During downturns, illiquid assets may lose value or become even harder to sell or liquidate. If your wealth is heavily tied up in these types of assets, you may be forced to sell them at a loss or under unfavorable terms, increasing your financial stress.
So how much of each asset type should you have? While that is the great question, there is not a one-size-fits-all ratio. Maintaining a proper emergency fund is the best place to start, typically 3 to 6 months of living expenses, sometimes more depending on the variability of household income. Beyond that, everyone has their own long-term financial plan, so everyone has their own ratio of liquid to illiquid assets that works best for them. Liquidity needs also change over time with life stages, job changes or major purchases, so it is important to monitor consistently. Regularly reviewing your liquidity ratio can be a powerful tool in decision making and ensuring that your financial plan stays aligned with your goals and risk tolerance. Diversification is not only about the different types of investments you own, but also the different levels of liquidity for each of those investments. A healthy liquidity ratio provides stability, flexibility and confidence. It offers protection in times of need and positions you to take advantage of opportunities as they appear. By understanding and maintaining your own liquidity ratio, you lay the foundation of a resilient long-term financial plan.
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