Thank you to Thomas Dogas from the Association of Financial Educators for highlighting the importance of financial planning and the different types of ways we can help save and plan for our financial future. There are so many ways that we can accumulate wealth, save for retirement, and plan for future financial expenses that it can become overwhelming and confusing on where to start. Developing a plan that is tailored to your specific life circumstances and financial goals will help greatly in determining what vehicles to use. So let’s take a look at what we can do to plan for the future and find out the power of liquid assets.
Prepare for Life Events
The essence of financial planning is to prepare for your life events which generally culminate in retirement. Important life events that we might want to plan for include weddings, purchasing a car or home, luxury items, and retirement. These are all highs in our lives, but are you also planning for events that can have a negative impact – recession/depression, medical issue, job loss, world events? These events are just as important as the planned events in your life and your financial planning should be able to carry you through the ups and the downs.
Wealth and Liquidity
The concept of personal wealth tends to dominate our understanding of personal finances and financial stability – how much are you worth? Wealth is something that we need to generate and it can come from a variety of sources:
- Income
- Retirement accounts
- Social security
- Estate planning
- Homebuying
While building wealth is important to ensure that we meet our financial goals and can retire comfortably, ensuring that wealth is accessible is also important, aka liquidity. Liquidity refers to the ease at which an asset or security can be converted into ready cash without affecting its market price. It we have a lot of money saved, that is great, only until we need it and can’t effectively access it. For example, nearly 40% of Americans would have to borrow money if hit with an unexpected bill, with many turning to high interest credit cards to pay that bill.
More About Liquidity
Each vehicle in our financial plan will have a different level of liquidity; the following are some examples ranging from most to least liquid:
- Bank accounts
- Cash value life insurance
- Mutual funds
- 401(k)
- Real estate equity
A good rule of thumb is to have 20% of our liquid assets in traditional bank accounts (checking or savings accounts) and the rest in life insurance and accessible investments. This may seem overwhelming, but it’s important to take stock of your financial situation and come up with a plan to achieve financial independence. This can start with creating a budget then finding ways to reduce your expenses, consolidate loans, reduce financial charges, or reduce your debts. This may take time and that’s ok; the goal is to find a plan that works that can lead you to increase your liquid assets to ensure that you have the money you need when you need it.
Ways to help increase your liquidity would be:
- Evaluate your real estate – can you refinance your loan or perhaps downsize and make a profit on your home
- Increase your savings to 20% of your income
- Revisit your payment strategy – are your financial vehicles still aligned with your current financial situation and needs
- Restructure your debts – can you reduce your interested rates through consolidation or take out lower interest loans to cover high-interest debts (home equity loans, personal loans)
More Information
If you would like more information on vehicles of financial planning, please visit https://tinyurl.com/4vcsup53. If you have any questions or would like to review your personal situation, please contact Thomas Dogas at thomas_dogas@ca-strategy.com. You can view a recording of the webinar on our YouTube channel at https://youtu.be/pfU9IHMTNTc.
