Jul 18, 2019
**Summer Replay: Here is one of our favorite episodes we are re-releasing with a new introduction. Stay tuned for all new episodes coming later this summer**
The most liquid asset is cash, but what about other assets? And what does liquidity mean? On the Worth It podcast, we dive deep on what liquidity is (and is not) and what it can do for your finances.
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Which is easier to drink when you’re thirsty: a block of ice or cold water straight from the tap? The tap water, right? It makes sense in this context, but many people — especially business owners — have a hard time understanding how this applies to their assets.
Liquid assets are the kind of assets that are easy to buy and sell without affecting the asset’s price. This means that you, whether as an individual or as a business, can easily liquidate (sell) assets without worrying about delays in time or decreases in value. Think of the difference between selling some stock and selling a house; the stock has a very clear value assigned to it and you can sell it in a matter of minutes, while a house can take weeks to be valued, put under contract, and finally sold.
In this week’s episode of Worth It, Dustin and Danielle are talking all about liquidity and why your business needs it to operate properly.
01:04 The definition of liquidity
01:25 Why liquid assets are easy to buy and sell
03:15 Why real estate non-liquidity was one of the main causes of the financial crisis
06:20 How flipping houses are just real estate speculation (and not liquid at all)
10:16 Why business owners especially need liquid assets
10:46 The negative results of illiquid assets in a business
11:50 The tendency to look at illiquid assets as “superior”
15:25 Why real estate may not be the best asset option (price drops)
16:43 People are always willing to take your money
18:12 How giving back and investing in others doesn’t necessarily mean great ROI
20:13 Private equity and real estate investments aren’t always in your best interest
21:45 X ways to become liquid
22:12 The difference between liquidity and speculation in your asset classes
23:02 How investing in public investments with a financial advisor can up your liquidity
As Dustin and Danielle explain in this week’s episode, liquidity is kind of a big deal. One of the biggest reasons that the recession in 2008 hit so hard is the “illiquidity” (lack of liquidity) of real estate. The bubble burst and housing prices tanked; people didn’t know the value of their house and they couldn’t get a buyer. They either ended up being underwater (owing more than the house was worth) or they lost money on the sale of their house. If they didn’t have enough liquid assets — like cash — their net worth was essentially wiped out.
Unfortunately, many people seem to have a short memory when it comes to the real estate and economic crisis of 2008.
More and more, people are choosing to invest in assets like real estate and other businesses to try and grow their wealth. But what many people may not realize is that these purchases are illiquid — they can’t be bought or sold quickly, and the value of these investments can change from day to day.
As Dustin and Danielle explain, it’s easy to see illiquid assets as more valuable than liquid assets because you can see them, touch them, use them, etc. It’s hard to touch money or liquid assets because they’re often in funds, ready to be bought or sold. However, it’s hard to buy and sell illiquid assets, and it’s also harder to know the value of them. Back to the crash of 2008; people often assumed their house was worth the same value as before, and they were taken by surprise when it came time to sell.
You don’t want the same to happen with your personal or business finances, which is why it’s important to focus on building liquid assets to counteract illiquid ones (after all, the majority of assets are illiquid, especially if you’re a business). To do this, you’ll need to know what really qualifies as a liquid asset.
When you have investable assets (money you want to invest) set aside, it can be tempting to consider real estate, tech, business, or other investment pitches that come your way. But real estate and private equity investments aren’t liquid assets — they’re speculative. Essentially, a speculative asset has a lot of risk involved in it, but it can also gain a lot of money. Think of fixing and flipping houses; that may seem like a liquid asset because you can sell the house as soon as you’re done fixing it up. But the value of the house is not guaranteed — and you can’t sell the asset as quickly as you’d think.
The same goes for other assets, such as private equity investments in startups or product inventions. Essentially, if there’s a risk that you could lose all your money before you’re able to cash out, it’s a speculative investment rather than a liquid one. In the episode, Dustin and Danielle discuss why these different investments may not be the best option, especially if you’re trying to up your liquid asset levels. They also talk about why investing in the stock market is one of the best ways to up your liquidity.
The stock market is composed of some of the most successful businesses in the world. Rather than investing in a single business with a high level of risk, or focusing on building a “fix-n-flip” real estate portfolio, why not look into the stock market? An investment portfolio will mix up a portfolio of stocks in a number of these businesses and will help you grow your liquid asset portfolios. A liquid portfolio can be easily sold in a matter of days to get you flush with cash, or you can keep letting these assets grow so that you have what you need to get kids through college, create your work-optional lifestyle, or weather a tragedy.
Investing in the stock market is less cost, less stress, and less overall risk than other investments or illiquid assets. It gives you peace of mind too, knowing that you’ll have a liquid portfolio that can provide financial support in just a couple days. The best part? You can still start investing in these liquid portfolios without an advisor. There are a lot of great resources or you can even start an account online with any online investment firm.
If you are interested in working with a financial planner who can help you understand how much you need in liquid assets and which investments you should consider, contact Toujours Planning. You take the quiz to see if you’d be a good fit!
This material is for general information only and is not
intended to provide specific advice or recommendations for any
individual.