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Understanding Liquidity

You’re on the road to becoming a world-class saver. But it’s important to consider your assets as they’re invested today and determine where they fall on the spectrum of liquidity.

If most of your money is in your retirement plan (less liquid) and you have a minimal amount of money in your savings account (more liquid), then you don’t have enough liquidity. That’s because your retirement plan would be hard to access and borrowing against it may cause a penalty. In comparison, your savings account is easy and free to access, and is therefore more liquid.

So, let’s talk about why liquidity is so important.

The problem: Most people don’t have enough in more-liquid savings.

Two thirds of Americans say they would struggle to come up with just $1,000 to cover an unexpected expense.1 Even 38% of people who make more than $100,000 per year say they would have some difficulty coming up with the $1,000.1 Regardless of income level, most people don’t have enough liquid savings — so an unexpected expense is likely to result in financial disruption.

Have you considered how you might respond to an unexpected expense? You may have a variety of different types of accounts, but would it be possible to access that money?

The solution: Striking a balance between more- liquid and less-liquid assets.

Creating a balance by having a mix of more-liquid and less-liquid assets is key to being prepared to handle your today's — and your tomorrows.

Consider again how you would access your money in a bank account vs. your retirement plan.

A savings account is undeniably more liquid because you can always access your funds and receive every dollar, whereas a retirement plan is much less liquid because there are penalties for early withdrawal.

Not all assets are black and white when it comes to liquidity. It’s possible for some assets to be more liquid than others. To determine whether an asset is more or less liquid, ask yourself:

1. Can I convert it to spendable money immediately?

2. Will I receive the full value of my money (no penalty or financial loss)?

If the answer is “yes,” the asset is considered more liquid. If not, the difficulty of accessing your money and the extent of penalty determines that the asset would be considered less liquid.

Because mutual funds only take a few days to access and usually realize their current value, they are considered more liquid. The short wait for the full amount of your funds is certainly much easier and less painful than an early withdrawal from a retirement plan.

Real estate is considered less liquid because it can take months, even years, for property to be sold and converted into spendable money — and it’s possible to lose money on the sale. However, that doesn’t mean that real estate can’t ever be a good investment. That’s why having a mix of more-liquid and less-liquid assets is important.

How to strive for a 50/50 split:

So, you’re saving 15-20 percent of your gross annual income. Where exactly should you put your money?

Ideally, you want to get close to having 50 percent of your assets in more-liquid funds, and 50 percent in less-liquid funds. This is a general guideline — it doesn’t have to be exact to achieve balance.

But first things first. You need liquid assets to be financially prepared for life’s unexpected events. That means you should first build life event funds of 80 percent to 100 percent of your income in more liquid savings — money that you can access immediately.

Savings accounts, mutual funds, and cash value life insurance are all liquid assets that can provide the money you need to be financially prepared for today.

Once you’ve built your liquid life event funds, it’s time to start putting your savings into less-liquid assets that can help you in the long term. Your retirement plan, college savings plans, and real estate are all assets that can provide security and income for the future.

For example, if you have $100,000 in a retirement savings account, real estate and another $100,000 in bank accounts, mutual funds, and cash value life insurance, you now have well-balanced liquidity and secure assets.

Ideal savings: a mix of more liquid and less-liquid assets.

Your finances, balanced.

Fortunately, having an ideal balance of more- liquid and less-liquid assets puts you well on your way to being a world-class saver on the path to

Financial Balance®. By building life event funds

with adequate more liquid savings, and less- liquid savings for the long term, you’re setting yourself up for success.


1 “Views of the National Economy Are Clouded by Personal Finance and Employment Concerns.” Projects/Programs. The Associated Press-NORC Center for Public Affairs Research

Trademarks of The Guardian Life Insurance Company of America (Guardian) are used with express permission. © 2018 Guardian

This material is intended for general public use. By providing this material, we are not undertaking to provide investment advice for any specific individual or situation, or to otherwise act in a fiduciary capacity. Please contact one of our financial professionals for guidance and information specific to your individual situation.

Pub7729 2018-71334 (Exp. 12/20)

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