How Liquid Are You?
We all need liquid to survive right? Of course, we do...we all know that we need water to live. Experts say that a human will die after three days without water.
So, if you had to traverse a vast arid desert, knowing what you know how much water would you take with you? Enough for a day, a week, a month? Practical wisdom tells us that we should carry as much water as we can. Why? Because you never know what could happen and having more than you need forestalls an emergency.
Well, most of us will not face the dilemma of crossing a desert. But we all face the challenge of finding our way financially. It is like crossing a desert. We are constantly exposed to risk. Will an emergency arise? Yes, it will...that is life. The car breaks down, kids need braces, an emergency room visit, someone loses a job...whatever it is we know with a certainty the unexpected can be expected to happen. So, this is where we need liquid.
Just like a desert wanderer needs liquid to survive and overcome the unexpected, we need to have enough liquid cash at the ready to deal with life.
How liquid are you? In other words, how much cash do you have quick access to? Recent data says that 40% of Americans cannot handle an unexpected expense of $1000. You might say isn't that what credit is for? Sure, you can use credit for things like this but eventually you will have to pay that back plus fees and interest. That is why experts say we should have 3-6 months’ worth of expenses in our emergency fund. Is this reasonable? Absolutely. People come up against emergencies all the time...we could get in a car wreck tomorrow that prevent us from working...without enough liquid cash you’re up a creek without a paddle.
To find out where you are take a piece of paper and on the left-hand side write down how much money you need to pay all your expenses for a month. Then on the right-hand side write down how much cash you have on hand, include checking, savings, and any actual cash. After that take, the cash on hand figure and divide it by your monthly expenses. This will give you your liquidity ratio.
Monthly Expenses Cash on Hand
$3000 Checking $750
Actual Cash $200
$1950/$3000=.65 (Liquidity Ratio)
From the above example we see a liquidity ratio of .65. What does that mean? In means that this family could survive .65 months or a little over 2.5 weeks without any income. Which is scary. If they could take the next 6 months to a year and build their emergency fund up to $9000...they will be a lot better off.
How can a person get there? It doesn't matter if you can only save a little...save it. Even $25 a week adds up...more likely with a little effort and diligence you could save 5-10% of your bring home pay...and after a while it becomes second nature to do so. After a year or two you would easily have 3 to 6 months in your emergency fund.
If this is something you need help achieving, especially the budgeting and planning part, get ahold of us to set up a complimentary consultation. We can discuss what your goals and challenges are and get a plan in motion to help you stay liquid.