Understanding Financial Liquidity – Episode 363

This transcript was auto-generated and may contain errors.

[00:02] On the Prosperity Podcast, we’re going to be talking about liquidity and we’re going to define what that means and how you can set up your finances in a way so that you actually can touch what you have and not just look at all of this hard work and have it untouchable. I’m sure Kim, you’ll be able to explain this a lot clearer and better than me. You did great because touching is a big part of it, right? How much of our money can we not touch? Yeah, you know, that’s a really good question. It is. A lot of people think they have their wealth built into a mortgage or into a rental property or into a business and I’d say you look at it a little different. I do. In fact, it always cracks me up the Forbes 500 or the there’s various lists that always

[00:51] show up. And even if you just Google like any kind of celebrity on the internet, one of the first things that comes up and is definitely the measuring stick for all the top 500, et cetera, et cetera, lists is net worth. Net worth is an interesting number. It’s one that’s hard to pin down for a lot of people. And it has nothing to do with putting food on the table, providing the ability to take care of emergencies when they occur. More importantly, except ACC, EPT opportunities when they occur, all of that type of thing is handled because of liquidity. It’s not anything to do with net worth at all. So would it be suffice to say forget net worth and focus on liquidity? Yes. And I think I would ask that cash flow also be focused on.

[01:47] So liquidity, let’s define that. Money, cash, cash value, CDs, maybe muni bonds, money markets. That’s about all the checking accounts. That’s about all that I can think of that meet the definition of liquidity. And I know a lot of people think that their stocks and mutual funds are liquid and they are. And yet I know a whole bunch of people that would absolutely refuse to liquefy, in other words, sell and make liquid any stocks or mutual funds in the last few months as the stock market itself has gone on its little roller coaster ride. So liquidity means money that you can get at in 7 to 10 days that you do not have to wait for anybody else to do anything else for you to have access to that money.

[02:48] And so when you look at that definition, there’s a whole lot of people that are not liquid and have no reasonable portion of their net worth as liquid money. OK, so I’m going to push back on this because I want to get some clarity. If it’s money in 7 to 10 days in this definition, do you apply any part of penalty? So, for example, you know, you point out a certain account, you have a penalty. If you have ownership in real estate, you could fire sell it and then you’d have cash in 7 to 10 days. So help us understand that. Yes. Great question. So no penalty, no 10 percent for early withdrawal penalty, no reduction of value for file fire sale penalty, no penalty at all. And I’m not saying that there’s no cost or fee or interest rate, because often

[03:39] there is some type of cost, fee or interest rate. But let’s draw the dividing line to where that cost, fee or interest rate is normal and part of any type of accessing that liquidity, no matter when or what or how quickly. So I think that kind of separates out all types of retirement funds, which are not liquid because of the 10 percent penalty, all types of real estate, which are not liquid because you would have to sell them. And as you identified to get it that quick would be a fire sale if you could even get it done that quickly and all types of a lot of investments. Now, of course, lots of good alternative investments aren’t liquid anyway, but even the stock bond and mutual fund space that we could consider

[04:27] maybe being liquid again because of the volatility, the movement up and down of their value, they are not liquid because there are times that you would not want to have to liquefy them. Yeah, that’s very true. So when you’re helping people with this, I imagine there’s certain we’ll call it milestones. So you’re saying, hey, be liquid at this amount. Is are there certain categories you put people into? Yes, I think it’s really a personal opinion. But I’ll tell a fun story. Recently, somebody came up to me and was just talking about their net worth, and I asked them what percentage is that liquid? What percentage of that net worth? And I knew the bulk of his net worth was a particular type of asset.

[05:13] And his eyes got kind of big and he said not much. So what’s interesting is that the first job of liquid money is to be people’s emergency funds. And so everybody has their own threshold for this dollar figure. If you’re just out of college, you’re just getting a new job. You really don’t have a lot of obligations. Your emergency funds could be five or ten thousand dollars. If you’re more of a family person, you have a home. Both people are employed in relatively stable salaried positions. Maybe your emergency fund is 20, 30, 40, 50 thousand dollars. If you’re a business owner, maybe you have that said fifty thousand dollar personal emergency fund, but you might also have a hundred thousand dollar business emergency fund.

[06:06] And of course, as I’ve shared numerous times on the podcast, if you’re Oprah Winfrey, your emergency fund is seven million dollars. So this is what liquidity is for first emergencies. OK, perfect. So in some research to this, I’ve gone through and and I’ve used our helpful friend Google to find some different topics on liquidity. And it’s funny because obviously is going to be a personal opinion of how much liquidity we should have across the board. No one is arguing against the emergency fund. At least financial people are on the same page there, isn’t that great? Yes, a rare occurrence. And I think that anyone and I would say this, anyone that is not in agreement with that has not actually

[06:57] amounted some serious wealth or they’ve never faced a challenge. And watch out, it will come. So absolutely. I mean, here at the beginning of summer twenty twenty, we have seen such proof in the last three months of the absolute necessity for liquidity in the form of an emergency fund. And those that have it are doing fine. Those that don’t are scrambling. And I also want to add in to this discussion what a lot of people use as their emergency fund. And it’s available credit. So, yeah, an empty credit card where you could put said five or ten grand. That’s a nice start. A home equity loan or a line of credit that’s on your home equity. That’s a nice start. But both of those things can be taken away from you.

[07:54] Yeah, you know, in fact, I think just a few weeks ago, Wells started taking away home equities. So they’re changing. I’m not surprised. Yeah. And then we can see what’s happening right now in the credit card world. You know, the person could have a credit score, I don’t know, call it low seven hundreds. And it typically used to be like seven twenty and above. You could get almost any credit card. Now they’ve shifted that. And they said, hey, now seven sixty. So they’re changing up quite a bit. So in the research that I’ve done, it says the number one reason for bankruptcy in America is medical debt. Kind of scary, right? That is. And again, I would absolutely guess that those people had no emergency funds,

[08:37] no ability to pay. But obviously, some medical debt is going to be extreme because of some occurrence. But I’m guessing that a lot of it is actually not that much in terms of actual dollars, but it was more than they could handle. Yeah, absolutely. So, you know, in our conversation, we’ve talked about liquidity, what it means. I think this is a great podcast. I think it can be for a beginning person getting familiar with how money works. And it can be all the way up to a seasoned investor that’s saying, hey, maybe I need to recalibrate. So this really hits both sides to that conversation. And the next is making sure that you have that emergency fund. And you mentioned a few things that I typically wouldn’t think of,

[09:23] like having a credit card with, you know, some money you could put on there if you happen to need to do that. Right. That can be your emergency fund. Yes. And it certainly can bring some peace of mind, which is what liquidity does. And I think this is why having that emergency fund really dialed in and make sure that you talk with your spouse or significant other about it also, because they may have a very different perception for what is peace of mind for them. And having that dialed in is so interesting. And as I’ve watched clients, I’ve been helping people with their personal finances over 30 years. And as I’ve watched clients get older and many of them with larger net worths, that emergency fund level,

[10:11] especially when you look at it as a threshold for peace of mind, rises and rises and rises and rises some more because we get to a point where we’ve seen the stock market corrections, we’ve seen the real estate corrections, we’ve seen what cash can do and we’ve seen what the lack of cash can do. And one of my favorite sayings for wealthier people that have investment real estate and have businesses is that cash flow issues do not go away. They just get bigger zeros on them. So true. Yeah, I know for ourselves. I mean, I remember when 10 grand was a good emergency number for me. And my number is 10 times that right now. And ideally, one each for personal and business. And I can very quickly see where that would be 10 times again,

[11:08] if in fact, it isn’t already. So that ability to make that liquidity stay on track percentage wise with your net worth. And I get it. It’s so boring. It’s so not fun to think about. And so I have a solution for that. But I just want to make sure we’re on the same page so far. Any questions or comments or argue with me so that it helps our clients learn? You know, I can’t argue on the emergency fund. I can argue on the credit card. But I guess in some situations, you know, I’ll roll back to this. I remember last year we were in South America and we had a family medical emergency, right? And it was very costly. I mean, we’re talking over ten thousand dollars. And I put it on a credit card and paid off that credit card that month.

[12:02] Now, I could imagine how stressful that would be if I did not have the means to pay that. I could imagine now I’m strapped with a 20 percent interest rate or whatever that would be. Right. So there are circumstances, you know, on the credit card, I get that. I hate dangling this lifeline, but truly some people need it, especially now, I think unemployment’s risen so much. We’re just going to have to do uncomfortable things. Yes. Well said. And without a doubt, managing one’s credit score, you talked about the 720 to the 760. That’s a skill people need to learn. And managing our mindset around this whole space is a skill that people need to learn. Managing how we handle uncomfortable situations.

[12:53] That is a skill that people need to learn, me included. It’s something that doesn’t matter once you’ve learned it. Sometimes you have to learn it again. So these are all valuable things that we can learn about. Yes, absolutely. There is one last thing. I would love to kind of throw a bit of a curveball. And it’s this we’ve talked about financial liquidity, but I believe that there is a relationship liquidity, meaning, as you’ve mentioned, that it’s money we can get in seven to 10 days and without penalty. Do we currently have relationships in our lives where we can get outside help and there’s not going to be penalty? Or we can get outside help and it’s actually going to come within a reasonable amount of time.

[13:33] What are your thoughts on that? Well, it’s a great thing to bring up because without a doubt, many people, no matter their age, would turn to parents and even grandparents for an emergency like that. You know, think about your own situation with your family. If you hadn’t had that credit card and or even if you’d had it. But then the next month, it was problematic because of its payment or its interest rate or whatever. Then parents and grandparents are a logical source of relationship. Yet we know from statistics that there are many, many, many parents and grandparents, whatever age you put in those categories for yourself that don’t have their own emergency or liquidity funds available. So I think then it’s business relationships that you might turn to.

[14:24] It is other friends that you might turn to. Now, we could do an entire podcast on the problems that either of those two could bring up, which actually the parents and grandparents should be thrown into that same category in terms of borrowing money from friends, family, et cetera. And I do want to leave our listeners with some really concrete things in this space that they can work on. And so relationship capital to pick up on your use of the word relationship for liquidity is something that I think should always be worked on. And it’s something that you can make deposits into, not necessarily financial deposits, but just gifts of time or experience or contacts or what have you. Those are all a part of relationships.

[15:16] And someday, sometime that may end up forming into actual dollars. Absolutely. So well said. I will throw one lifeline out for listeners. There may be some people, depending on geography of where you live in the world, or it could just be where you are in the financial game. Maybe you’re just starting out or you’re recovering from something. If you don’t have a mentor or the relationship capital, this podcast is a perfect example. You put it in your earbuds, listen, and now you have insights and you can consider that a friend or advice. And then you can go in with a call, pay it forward, make deposits into someone else. But on this podcast, you can make those withdrawals. And so, Kim, I’m extremely grateful for the insights that you give

[16:07] listeners, but myself included, because you and I get to hash out these topics and these principles and go through them together. Well, thank you. Just as we’re wrapping up, I want to leave one last tip because it will help with the excitement and the energy and the incentive of building and maintaining that emergency fund. And that is to also think about it as an opportunity fund, because if you’ll transition as quickly as you can from emergencies to opportunities mentally, because usually that’s the first place that any transition is made, then it will become much more exciting to continue to build that liquidity. So our liquidity accounts, in my mind, need to be for both emergencies and opportunities.

[16:56] And we all have heard of story upon story where somebody was able to take advantage of an opportunity because they had liquidity. And so when you make opportunity the goal of building liquidity. So, yes, you first need to make emergency the goal. But once and as quickly as you can, you can switch to opportunity being the goal. It’s way more exciting to build liquidity. Yes, it is. It becomes a game at that point. Absolutely. It’s cool. Well, listeners, thank you for spending time with us. One thing we did not touch on is this best vehicle that Kim has found for creating the emergency and opportunity fund is through a whole life mutual. I’m going to I’m going to I’m going to tear this apart. But whole life mutual backed company, is that correct?

[17:46] That’s pretty well said. We’ll let it go. You will say, OK, OK. I again, I’m not a licensed insurance agent or financial advisor. What I’m doing is I like to ask questions and find solutions. And I have yet to found a better solution. So, Kim, can you tell people how they can ask about that from you? Absolutely. So we have a special email for our podcast listeners. Hello at partners number four prosperity dot com. And that comes to me, I pay close attention to it. Many of you have corresponded with me on that. Many of you are clients and understand whole life as your emergency opportunity slash legacy fund, because it has a whole third component there that we didn’t talk about today. And for those of you that are not familiar with it,

[18:34] Spencer and his enjoyment of it may not have all the words right, but he got the gist of it across. And I would welcome questions. And we certainly have books and other podcasts on this subject that you can use to learn. So reach out. Don’t be stranger. Happy to help. Hello at partners number four prosperity dot com. Thank you for listening to the Prosperity Podcast. To take control of your money and have it work for you. Visit us at partners for prosperity dot com. If you liked this episode, make sure you subscribe and leave a review.