Often when we are younger and we start to accumulate wealth, one aspect that we
tend to neglect is the need for liquidity. I have met with numerous individuals
over the years who have invested everything they have in either their business
or, more commonly, in real estate. I have spent many columns writing about the
need to save in any way possible. The more you can save and invest, the better.
But there is another very important aspect that needs to be paid attention to,
and that’s liquidity.
What is liquidity?
Liquidity is the ability to
quickly convert an investment into cash, without losing any of the principal
that you’ve invested. For example, a savings account is highly liquid.
contrast, real estate is considered to have low liquidity because of the time it
takes to sell the property and the fact that if you need to sell quickly, like a
fire sale, you will end up paying the piper because the price of your property
I work with many clients who are at the stage of starting to
marry off their children. When we start to plan, they tell me of how much there
home is worth and how much it has appreciated. That’s fantastic, and it’s
definitely turned into a nice investment over the years. So what’s the problem?
The problem comes when individuals put every last cent they have into their
I recently met a couple who told me how they keep investing in
their home, and it’s now worth over $750,000. When I asked them how much liquid
money they have, including investments, checking accounts, etc., it came to less
than $30,000. They have a very respectable net worth, but 95 percent of their
money is tied up in a property.
They have a daughter who is going out
seriously, and they suspect she will get engaged in the next few months, which
means a wedding in the next year or so. Their problem is how are they going to
pay for it. You can’t take a saw and cut off a room and say, “Take a bedroom –
it’s worth $50,000.” It just doesn’t work that way.
financial advisers recommend building an emergency cash fund of between three to
six months your net monthly income. If you net NIS 10,000 a month, you would
want to have a minimum of NIS 30,000 that you have earmarked for this emergency
fund. This will help you survive for a limited period of time if you lose your
job or are too ill to work. That sounds like a lot, but remember this is your
Should it be invested?
Now that you have started to save for
your emergency fund, you may ask how the money should be invested.
the nature of this money, and the fact that it needs to be readily available and
that you can’t afford to take risk, many will say the best thing that can be
done with this money is putting it into a short-term deposit or government bond.
I beg to differ.
In today’s record-low interest-rate environment, there
is little point of using a short-term deposit or government bond. They literally
pay next to nothing. I think most investors are willing to “sacrifice” the $2.34
of interest they will get so that they can have their money completely available
at a moment’s notice. If interest rates move back to more historic levels, then
deposits and bonds would make sense, but not now.
You need to know at the
end of the day that you have X amount of money available in an emergency and not
a penny less. So to foolishly take risks with this money by investing it in
stocks or stock mutual funds is a risk that could have severe consequences if
your gamble does not pay off.
email@example.com Aaron Katsman
is a licensed financial adviser in Israel and the United States who helps people
with US investment accounts.