Dear Chuck,
Help me understand the principle of liquidity. What do I need to do to be more “liquid” right now?
Preparing for the Worst
Dear Preparing for the Worst,
Liquidity is the measure of your ability to exchange an asset for cash. It is a tool that gives the ability to stay afloat in a crisis situation, provides margin and protection for individuals, families, churches, not-for-profits, and businesses.
Liquid assets include things like certificates of deposit, public stocks and funds in your bank account. Non-liquid assets include real estate, jewelry, collectibles and retirement accounts (if they have not matured beyond the early withdrawal penalty phase). For a small business this may mean equipment, receivables, or accounts.
How Much Liquidity Do I Need?
It varies. A good rule of thumb for individuals is to have one month of income in actual cash that you keep in a safe place at home, and 3-6 months in an emergency account. Of course, this is under normal economic circumstances.
Since you are preparing for a worst case, I would increase my total figure based on Joseph’s saving plan for Pharaoh in Genesis in which he set aside 20% of the grain for 7 years. That means we should have the ability to access 140% of our income in a worst case economic crisis (20% x 7 = 140%). So to revise my numbers above, have one month of cash needs on hand at home, and 15-16 months of your normal income or enough to cover necessary expenses in cash accounts.
I believe this scenario is a safe level of liquidity. Of course, you can always be 100% liquid if you choose or need to. That would mean selling all non-liquid assets and converting everything to cash. Doing so during a crisis is normally a bad idea unless you are in distress.
SOURCE: Christian Post, Chuck Bentley
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