Lack of Liquidity May Be Why You Donâ™t Feel Rich


liquidityDo you find yourself going to your credit cards a little to much? Do you ever wonder why don’t feel quite as well off as your income might suggest? Does it often seem that others have more money than you do, even though you’re pretty sure they don’t?

In each situation, the problem might be lack of liquidity. No matter what your income or net worth, few things can make us feel as financially constrained as a lack of liquidity. And by liquidity what I mean is the ability to spend money that doesn’t require either a) swiping a credit card, or b) selling or otherwise rearranging investments.

Liquidity is having cash in either your wallet or your bank account that enables you to spend money without concern for impairing your overall financial situation. Sufficient liquidity can make us feel richâ”or at least as rich as our finances will reasonably allow. But many people, even those of considerable means, might not have that liquidity, or the sense of prosperity it provides.

Why is liquidity so important, or perhaps even more, what causes the lack of it?

Not enough disposable income

There’s no escaping the fact that many people expand their budgets right to the outer limits of their income. There’s always some new service or membership to add to their lives, or a new place to direct part of the paycheck to that reduces the amount of cash that flows to the checking account. No matter how much money you earn, you’ll never feel rich if all or nearly all of it is spoken for before it gets into your hands. We all need a certain amount of discretionary income in order to feel good about our finances.

If you don’t have a whole lot of money left from your paycheck after paying bills and filling investment accounts, it’s time to get rid of some expenses. The question should be asked: would I feel better with Service X, or with the extra money from not having Service X? A little bit of cash in the wallet can go a long way toward improving how you feel about your financial situation.

Too much stuff

Some people are clothes horsesâ, some are gadget hounds, and some just collect stuff. Many feel a strong pull to have the latest what-ever as if not having it will leave them out of some cosmic loop. In other cases the stuff isn’t so little. An over-sized house (or more than one) or a passion to own the latest and greatest luxury car can turn a necessity into mere stuff. Yes, beyond a certain point even your house and car become stuff!

Having stuff may feel good at some level, but stuff is like any other expenseâ”it soaks up cashâ”and that drains liquidity. And there’s a close correlation between having a lot of stuff and having very little unencumbered cash.

Next time you’re tempted to spend more money on the latest gadget, choose not to do it. A thicker wallet and a fatter bank balance just feel so much better.

All of your money is in targeted investments

This might come under the heading of a good problemâ, but some people have too much sitting in investments. What? Too much money investedâ”is that even possible? Yes! Some people have an obsession with being fully investedâ. Every free dollar they have is plowed into some investment somewhere in the hope of earning even more money. Stocks, mutual funds, brokerage accounts, and even retirement accounts.

Pardon me for saying as much, but that kind of investment strategy strikes me as more than a bit compulsive. Not only is it a classic money chase, but it can also be dangerous, such as when you’re 100% invested when the stock market tanks.

Everyone needs some margin in their lives, even when it comes to investments. What good does it do to have a million dollar investment portfolio if you don’t even have $10 to give to a homeless person on the street, or when you have to swipe a credit card to buy a cup of coffee at Starbucks?

Creating liquidity with debt

Finally, let’s take a look at how the liquidity issue is often resolved; it’s the darker side of the picture. If you don’t have enough money in your wallet or sitting in your checking account, the default solution❠is often a credit card and that means debt. Debt is not liquidity. Liquidity means you’re able to spend money with no strings attached afterward; debt requires repayment after the fact and that’s not liquid.

Lack of liquidity is a major cause of debt. Often debt grows even as investment worth increases precisely because debt is used to preserve the flow of cash into investments. In extreme cases, a rising debt level can be ignored while the growing investment pile gathers the attention. This can lead to a high asset/high debt situation that can rise to crisis levels. This is especially true if most of the investments are held in tax-sheltered retirement plans that can’t easily be liquidated to deal with excessive debt levels.
Being rich isn’t all about a high income or a large investment portfolio; it’s also about balance, and that requires a solid amount of liquidity. It’s also the feeling that comes from having control over your finances. If your income is offset by equally high expenses, or if all of your money is tied up in stuff or even investments you won’t feel rich no matter how high your income and asset numbers are.

Yes, a little bit of cash can go a long way.

photo by vox_efx

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Written by Kevin

With backgrounds in both accounting and the mortgage industry, Kevin Mercadante is professional personal finance blogger, and the owner of OutOfYourRut.com, a website about careers, business ideas, money and more. A committed Christian, he lives in Atlanta with his wife and two teenage kids.

Kevin

With backgrounds in both accounting and the mortgage industry, Kevin Mercadante is professional personal finance blogger, and the owner of OutOfYourRut.com, a website about careers, business ideas, money and more. A committed Christian, he lives in Atlanta with his wife and two teenage kids.

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