“Money is power” is a statement often made, and it does make sense. Money opens up horizons and allows an individual to explore their interests and passions, but more importantly, it can help provide safety and security. With money, people can put their needs and wants first, allowing them a degree of freedom.
Money is life-changing, especially for women. The option of paid labour gives women the power to make decisions related to finances. But building assets for a better future is not enough. Women should also know the importance of liquidity and how it can impact their financial freedom.
Pooja Joshi, a 39-year-old Senior Software Engineer at Mphasis opines that a grip over one’s finances helps women take charge of their lives. She says, “Every woman deserves to be financially independent. Economically independent people don’t rely on others to make decisions. In addition, better financial decisions are an essential ingredient of success in every zone of life. It makes you more confident and future-ready to face any emergency.”
An imperative aspect of planning finances is ensuring that you accumulate assets with good liquidity.
But What Is Liquidity?
Liquidity refers to the degree of ease with which an asset can be converted into money. Cash is considered the most liquid asset since it is a readily accessible source for spending.
However, assets such as property or jewellery are less liquid and are not as easy to convert into cash.
Assets with good liquidity provide women with a safety net in case of emergencies. Have you heard of Streedhan? It is basically property or assets like gold jewellery that are given to women by their family at their weddings. The purpose of Streedhan is to provide women with an asset that they can convert into cash if they face any financial difficulties. However, Streedhan is not an asset with good liquidity, say like shares, since a woman would have to go through a time-consuming process to sell her jewellery in case she needs money, that too on an urgent basis.
Why Is Liquidity Important?
Liquidity is important as during emergencies, people will not always have time to sell off assets like cars or second homes in exchange for cash. Having money that is readily available is a boon during difficult situations where time is of the essence.
Not just in emergencies though, liquidity should be an integral part of your portfolio as it also gives you instant buying power and financial flexibility. Say, you went to a mall tomorrow and really liked a limited edition jacket. Now if you didn’t have access to cash, UPI or cards in that instead, but were just wearing a gold ring, would you be able to buy that jacket instantly? No. You’d need to find a jeweller, sell your ring, collect the money and then buy what you wanted. This is the exact reason why we are advised against investing all our money in fixed assets, but set a certain amount aside and invest some amount in mutual funds, shares, etc., that have high liquidity.
Which Assets Are Liquid?
As mentioned before, cash is the most liquid asset since it requires no conversion before being used for spending or investing. Cash equivalents such as funds deposited in bank accounts are also easily accessible and are considered liquid assets.
For an asset to be considered liquid, it should have a large number of readily available buyers and should be converted into cash within a short amount of time.
Assets such as stocks, bonds, mutual funds, and exchange-traded funds (ETFs) are also liquid assets. Converting them into cash is slightly more complex, but since such assets have buyers and sellers available, they are easily sold.
Another asset with high liquidity are liquid funds- a type of mutual funds that invest in short‐term assets such as treasury bills, government securities, repos, certificates of deposit, or commercial paper, with maturities of up to 91 days. While returns are low, such funds offer people the flexibility to take out their money as and when they require.
On the other hand, a fixed asset is one that cannot be liquidated quickly. Property, vehicles, furniture, and antiques are all assets that can not be converted into money quickly. Assets like property can be sold for a large sum of money, but the process is not quick and is time-consuming.
Another question that often arises is, how much liquidity is too much? Is there an ideal proportion for financial liquidity that we must always keep in mind? Turns out, there is- at least 15 percent of your portfolio should have assets with high liquidity at any given point.
Financial independence can change a woman’s life, but a decent amount of the money earned should be readily available for use. While investments are important for the long run, it is important to remember to maintain liquidity so that you are prepared for contingencies and can spend the money on your linking. There’s no point in saving money if it can’t be readily spent.
Disclaimer: Maintaining a lot of liquid assets can have an effect on your return. Get in touch with a financial advisor for a better understanding of your liquidity needs and investment tools.
The article is published in collaboration with BSE Investors’ Protection Fund to spread awareness with respect to personal finance and investing, especially for women.
Suggested Reading: Why Should The Gender Gap in Financial Literacy Concern Us?