The Importance of Liquidity

Once you get into the habit of spending less than you make, you’ll need to decide what to do with some of the money you’re not spending.  It’s common for money that you can access pretty quickly to be referred to as liquid.  So when people refer to financial liquidity or liquid reserves, they’re talking about accessible money.

It’s important for everyone to have a cash cushion for emergencies.  So some of the money that you’re saving should go into this emergency fund.

Eventually, you’ll want to have at least 10% of your annual income where you can get to it quickly without any tax ramifications or other penalties.  This money can cover most of your standard unexpected financial needs like a car repair or a health insurance deductible.

Then you’ll want another 20% of your income where you could get to it, but it might cost you some taxes or penalties.  This second savings stash is for less likely emergencies like losing a job or being out of work for an extended illness.

If you’re self employed, you’ll want these liquid reserves to be bigger than if you have a regular job with a steady paycheck.

If you don’t yet own a home, you should be putting money away for a 20% down payment on a house.

About the author

Linda Y. Leitz, CFP®, EA, CDFA

Linda Y. Leitz is a fee-only Certified Financial Planner™ and has been in the financial industry since 1979. She is also enrolled to practice before the Internal Revenue Service. Before becoming a financial professional, Linda held several executive positions in the banking industry. She began her career as a bank examiner. Linda has a BBA in Business Administration from Principia College and an MBA from Southern Methodist University.
As a fee-only financial planner Linda is a member of the National Association of Personal Financial Advisors, the Financial Planning Association, the National Association of Tax Professionals and the Alliance of Cambridge Advisors. As a leader in the financial planning industry, Linda is the author of the book titled "The Ultimate Parenting Map to Money Smart Kids". She has been quoted in several national publications including the Wall Street Journal, U.S. News and World Report, and Morningstar Advisor and she has appeared on CSNBC. She also works as a volunteer instructor to new financial advisors with the Alliance of Cambridge Advisors.

2 Comments

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  • Building credit without credit cards is a bit sticky. Some regular vendors you have might report regular payments as positive credit. But to actually get a credit history that you have control over, a credit card used wisely is hard to beat. I still believe that charging something each month and paying it off before it’s due is great. It can be one trip to the grocery store or one dinner out. But demonstrating that you can “pay as agreed” shows future lenders for bigger purchases like cars and houses that you can do just that – pay them as you agreed to.

  • Linda, in your opinion, what’s the best way to build credit WITHOUT a credit card? Thanks for the great articles, I look forward to everything you are writing here at FiGuide.

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