Financial planning involves more than wealth accumulation. It’s striking the balance between saving, investing and having cash readily available to keep you going when things go awry.
Here’s what you need to know about personal liquidity, why it matters and how to ensure you have the financial ability to pay for life’s unexpected expenses.
What is liquidity?
In business, liquidity refers to how much cash there is in the bank, and how quickly an asset can be sold without affecting current market value.
The more liquid a business is, the more easily it can expand into new markets, take advantage of mergers and acquisitions, and cover operating costs during off-peak periods.
Liquidity is measurable. It is essentially the total amount of cash and cash equivalents held by the business divided by the total monthly expenses.
The sum arrived at is known as the liquidity ratio. It’s an expression of the number of months the business is able to cover its expenses following a financial setback.
On a personal level, liquidity refers to the cash you have in your current, savings or money market account, plus the assets you can quickly dispose of at a fair price.
You can calculate your liquidity ratio by following the equation set out above.
Why business and personal liquidity matter
Liquidity is an essential component of sound financial planning, but only when it’s combined with growth opportunities.
Any financial advisor will tell you that you need a percentage of your wealth in cash holdings and liquid assets, and the rest in longer-term investment vehicles and illiquid assets – the equity tied up in your home, for example.
With sufficient liquidity you can:
- make timely investment or buying decisions
- be more resilient in the face of unexpected events
- avoid negative consequences of gaps in income
- prevent the sudden need for cash to compromise your growth investments.
Examples of liquid and illiquid assets
| Liquid assets | Illiquid assets |
| Cash
Checking & savings accounts Money market accounts Shares Exchange traded funds Unit trusts Bonds |
Property
Vehicles Restricted shares Retirement annuities Art and antiques Rare collectibles Jewellery |
Ways to improve personal liquidity in South Africa
Personal liquidity protects you when you’re in a tight financial spot and gives you the leeway to exploit high-growth opportunities if they arise.
Here’s a round-up of ways to boost your liquidity.
1. Diversify
The best way to accumulate and retain wealth is to diversify. A sensible balance of liquid and less liquid assets reduces overall risk. It allows you capitalise on higher growth opportunities while ensuring you have easy access to funds.
Having all your cash tied up in real estate, for example, wouldn’t be a good strategy. Similarly, leaving the bulk of your money in a low interest savings account is a bad idea.
2. Build and protect a personal slush fund
Create a personal slush fund that is only used in emergencies. Set up a debit order on your account and feed the fund with however much you can afford each month.
An interest-bearing money market account that allows immediate access is a great place to park the funds.
If you have a bond on your property, try to pay in extra each month. That way, you can move closer to full ownership of a major, illiquid asset.
If it’s an access bond, you can draw down all or a portion of the extra payments you’ve made, whenever you want.
3. Control costs
Control your personal costs as you’d control business overheads.
Cut back on wasteful and unnecessary extravagances on that daily cappuccino, lavish lunch and expensive artisanal gin or single malt. Ring fence the money you would have spent and add it to your personal slush fund.
Find a cheaper alternative for the daily commute to work. Use public transport or arrange a lift club. You’ll be amazed how much you can save on petrol.
Be aware of how much electricity and water you use each month. Try to cut back. Shop around for the best deals – it’s easier than ever online.
4. Consider a line of credit
When it’s used circumspectly, an overdraft or credit card can help you navigate tight financial spots. As funds are readily available, credit unlocks instant liquidity.
It’s a safety net for times when cash flow is an issue – like when you’re temporarily out of work or have no cash to pay the vet, dentist or roof contractor.
5. Consolidate debt
By consolidating debt into one monthly payment, you can save on debit order fees and negotiate more favourable repayment terms.
These types of loans typically have lower interest rates. Debt consolidation can free up cash that you can use for other purposes.
LoanAgainst: making movable assets more liquid
As a niche finance provider, LoanAgainst offers immediate access to cash backed by high-value movable assets.
Luxury watches, jewellery, artwork, designer handbags, antiques, collectibles and vehicles, which are traditionally fairly illiquid, unlock short-term liquidity – without involving a sale.
Why not apply online for a loan against your personal assets, and improve your liquidity.
