Liquidity – Episode 626

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[00:01] Welcome to the Prosperity Podcast. Prosperity thinkers, we’re going to be talking about liquidity and there are very specific pieces to liquidity. You get this wrong. Kim and our pre-talk, we use the words debt and death and destruction. A lot of other words that are, we’ll call it polarizing, but right now we’re going to talk about liquidity. Set the stage. There’s an acronym you always use, but we’re only going down the liquidity route today. Well, it’s a good one because I have heard so many comments about the home equity credit line being the place of liquidity for families. And so let’s dive into that a little bit. Let’s first decide what liquidity means. So you mentioned the acronym. We’ll just hint at it because part of liquidity is having control.

[01:00] And the acronym is CLUE, control liquidity, use and equity. Well, equity, right? Like we all want to think that we control equity and it doesn’t matter whether it’s equity in our home, equity in our businesses, equity in the stock market, because we’ve purchased stocks or mutual funds. We like to think that we control this space. I just heard of a business in Scottsdale, Arizona, that was very unique for Italian handmade shoes, especially really high-end and especially for people that had specific foot needs going out of business because there wasn’t enough liquidity to sustain the business while they found a buyer and they couldn’t find a buyer. And so they had to close. So sad. I hear people taking a first mortgage that is fixed at three or 4%, you

[02:01] know, they bought it, they bought the house maybe 10 years ago or so, and converting it into a home equity credit line that’s at six or 7% because they think that they’ll always have access to their equity via the home equity credit line. Spencer, do you remember in the 1990s, early 2000s, when banks closed home equity credit lines left, right and center? I do remember. I, in fact, I owned a real estate company at that time and we had a very sizable home equity and a very sizable, actually a very sizable line of credit, not home equity that was closed. Yeah. And it sucked. Yeah. You think you control equity. You think equity is liquid. And yet if you have to go to a bank and ask permission, or if the stock

[03:06] market has to be up for your liquidity to be available, that is not liquid. And so I want to go on record as defining liquid dollars as ones that you can absolutely get at any time without having to ask anybody for permission and it’s three to 10 days out. I mean, it doesn’t have to be 24 hours out. Nevertheless, it’s three to 10 days. It’s not 30, it’s not 90, it’s not after jumping through a whole bunch of hoops with paperwork or hoping that, for example, the stock market is up or the business is up. There there’s another business scenario that I’m aware of where they were using their personal home equity credit line to purchase inventory. And the business was profitable and everything was good, but they never

[04:04] took some of that profit to pay back the home equity line of credit. They just kept it high and kept purchasing more and more inventory. And so they got lulled into a sense that everything was going well until the bank said, you can’t have the line of credit at this interest rate anymore. They still left it open, but the interest cost was so much higher that the transaction that they were repeating of purchasing inventory was no longer profitable. And so these are examples that we get lulled into thinking that we’re in control about certain things when truly if we stepped back and looked at it objectively, we would realize that we’re probably not. And so I want to encourage families and it doesn’t matter what level

[04:56] of the game you’re playing. If you’re a young family, maybe your liquidity needs are only $10,000. But if you’re a family that has teenagers, your liquidity needs are probably a hundred thousand dollars. If you have a business that liquidity needs might be $500,000. I mean, whatever that emergency fund is for you, please get clear on the definition of liquid and use that three to 10 days list. Use that got to be able to get at it without asking anybody for permission list use. Maybe there’s other things that are important to you. And then the last part of this message before Spencer, I know you’ve got some great perspective on this, is to keep building beyond that emergency money dollar figure that you decided into an opportunity

[05:49] fund because it’s the opportunity fund that should then act like equity and be borrowed against for opportunities while that emergency fund remains liquid. Yes. So, so many pieces to unpack in this, because we’re seeing, you know, this isn’t a podcast where we like to talk about the news or current events necessarily, but there have been a few things recently with the tariff changes. It’s changed the banking and financial world where lines of credit are going away. We’re seeing where people are speculating too much. And then we’re also seeing because of turbulence, the people that don’t have liquidity can’t take advantage of opportunity. Kim, you’ve been in the strategic coach world for a number of years.

[06:43] And I remember just having conversations with you where people that did have liquidity that had sound principles and values when the outside world had a hiccup, they could take advantage of it. You’ve seen that happen many, many times. Tell us about that. Well, it is interesting. One, one story comes to mind. So I’m coaching a group of entrepreneurs. One guy has a margin account. So he had pledged his stock market account for a loan. And I don’t know what he used the money for, but he was getting margin calls and he was completely distracted during our day because he was trying to deal with this. During that same session, another entrepreneur was able to buy a business because they had access to cash and they could turn on a dime.

[07:42] And this was a supporting business to one that they already owned and fold that existing, those two existing businesses together and create a much stronger scenario all in the course of a day. Now a little extreme on both cases, but it’s a great example of the strategic coach members being clear on what liquidity can and cannot do. Yes, that’s huge. Perfect stories. Oh, thanks for sharing that with liquidity. There are a couple of things that, that I use as a guide. Personally, you’ve seen this play out much clearer than me. And so we have cash on hand, call it, you know, in the mattress money, we’ll use that term because that’s easy. Then you’ve got your savings in a bank account and in a part of the

[08:38] control liquidity use savings in a bank account has some use, not as much. You have cash and then life insurance policy. Now we’ve ramped that up and then you have the going to call it the illusion cash, it could be margin call cash, crypto and all of that. There’s fringe areas where that makes sense. Let’s touch on two things. Savings cash, savings, liquidity, and cash in the appropriate life insurance policy, because those are the two that will weather the storm. It is interesting. I hear families chase interest rates as it relates to savings in a bank in such a way that causes so much hassle factor, extra paperwork because of the various 10 99s that they’re getting from the banks that charge taxes on their

[09:34] interest and they’re after this high yield savings account and then they’ll move it and they’ll get that high yield savings account all in the name of increasing their 3% to three and a half percent or their four and a half percent to five percent or what have you. And so while I am a fan of having 10 grand or whatever number just is absolute got to have it at the bank often at the same bank where my checking account is for sleep at night money mattress money. Great. Do that. If that’s what serves you best and for your serious emergency opportunity money that is substantial in nature beyond that $10,000 number, the life insurance industry is so much more efficient of a place to store it. The growth rate on cash value of life insurance of a whole life product

[10:23] today doesn’t matter what insurance company, as long as it’s mutual and we’re talking the whole life is in the 4% range. That’s without tax for most families. That’s the equivalent of around a 6% return. And yet they’re locking up money in CDs or this high yield savings account that has all these rules at 5% taxable. And it makes no sense. And I understand it. It’s a learning curve that people, once they get past, can have so much confidence in the life insurance industry, which is close to a 200 old interest industry and actually safer and stronger than any bank or credit union out there. And so this is a space that if you don’t have knowledge around, please dig in and learn you’re welcome to reach out to me.

[11:16] We have materials to learn about the whole life insurance product and the life insurance industry and the good that can happen there, especially with the mutual companies where the policy holders are actually the owners of those companies, very similar to a credit union. I love it. I love the liquidity use of what you just explained. And I think the perspective that I gained from this episode is that, and I’m going to pull it back to that day and strategic coach and I wasn’t there, but I can just imagine an intimate room of people solving problems, completely focused in, or at least they should be. And one of the people is distracted by their perceived liquidity. And the other one had a solid foundation of liquidity.

[12:13] One at the end of that day, walked away with the new business, new liquidity, new revenue, new values, new principles, new relationships. The other one walked away with the day being spent in stress, not having learned and having spent all of their emotional baggage. Kim, for you to have coached through that incredibly valuable for listeners. If you’re in a situation where you think your liquidity is too high and you need to figure out where to make moves. Hello at ProsperityThinkers.com. If you’re in a situation where your liquidity is too low and you know, you need to do something, there’s no shame in it. Hello at ProsperityThinkers.com. Take action. Do you have any final little sound bites that we could give?

[13:03] Cause I know I’m trying to hype it up and I want to, I want to give that last thing. Like, what is that, Kim? Well, you said it so perfectly. It’s not a hyped up area. And that’s why so many people miss it, right? Every financial person out there is typically going to skip right over the liquidity discussion. They don’t get paid on it. It’s not anything that they want to focus on. It’s the investment space. It’s a hot, cool topic to talk about, but it’s the liquidity that creates that emergency opportunity fund that is the sleep at night money and the capability to solve emergencies and take advantage of opportunities. So while maybe the boring subject, oh my gosh, the good that it does. Yes, that’s, that sounds a little bit like prosperity.

[13:51] It’s kind of cool. Okay. Listeners, thank you for tuning in to the podcast. We appreciate every single one of you. We love your emails when you send those in. We love the reviews and ratings that you give as well. So if you haven’t done that in a while, jump onto Spotify, Apple, any of those platforms. If it’s a five star rating, that’s awesome. If you want to leave a review, we’d love that even more. Thanks for tuning into the show. Thank you for listening to the prosperity podcast to take control of your money and have it work for you. Visit prosperity thinkers.com.