“You know Ron, I’m telling you – we need to do something to change this. We had the opportunity to purchase my Uncle’s home when he went into assisted living. I could have fixed that up in a month & flipped it, and could probably have made a quick & easy $50,000.
I just didn’t have access to cash, and the taxes & penalties to pay on my 401k were just too steep.”
The term “liquidity” refers to how long – and at what cost – it takes to convert an investment into cash. The bills in your wallet are perfectly liquid, for example…
Now let’s suppose that you bought a handful of stocks. Although you may not be able to sell these on a Sunday morning before Church, you can sell most stocks pretty quickly during normal business hours; especially with the advent of do-it-yourself platforms like Robinhood and E-Trade.
Now if you hold stocks, bonds, and mutual funds within your retirement plans, such as a 401k or IRA, your liquidity position decreases drastically. With your 401k, withdrawals are subject to ordinary income tax, as well as a 10% tax penalty if you are under 59 & 1/2 years old. Sometimes you can borrow against your 401k, but that has a myriad of its own restrictions and challenges as well.
Real estate is generally much less liquid than stock. Preparing a property for sale takes time. And if you want to find a buyer willing to pay fair market value for the house, it could take weeks or months (notwithstanding the anomaly of our current real estate market, which sometimes only takes a day).
With real estate, it can also be costly. Repairs, agents’ commissions, closing costs, etc. can approach 8% -10% of the property’s value.
A privately run small business is among the least liquid of the good growth investments that you can make. Selling such a business typically takes much longer than real estate even.
Having liquidity – or access to cash – can protect your other investments in times of trouble. I usually recommend keeping liquid cash in a high yield savings account or money market – enough cash to be able to cover at least 3 to 6 months of expenses.
This can potentially keep you from being forced into racking up high-interest credit card debt or selling one of your investments that you intend to hold for the long term.
For many people, I also recommend owning maximum funded cash value life insurance. In addition to insurance protection for your family, these policies build equity that you can access tax-free – at any time, and for any reason – without an application, credit check, income documentation, or job verification.
The cash value typically grows at 4% to 6% over the long term – much higher than what you’ll receive in a bank account or money market. “Private Equity Banking” using an insurance contract is somewhat similar to a home equity line of credit, but you have much more control over the ability to access capital, as well as the repayment terms (and the speed of which you can obtain the cash).
In short, having this program as part of your financial plan can serve as an “opportunity fund” to quickly take advantage of opportunities when they present themselves, whether it’s an opportunity to buy or expand a business, purchase real estate, or buy more stocks after a market dip or correction.
In addition, this access is a contractual guarantee within the policy, so you never have to worry about having your personal line of credit shut down as Wells Fargo did to its customers this past summer. [1]
Proper financial planning should have a focus on liquidity as one of its primary goals. If something bad happens, and you don’t have the liquidity to handle it, it could set you back years by having to rack up credit card debt or to liquidate your retirement accounts and pay hefty costs and penalties.
And not to mention, the years of regret from having to pass on an opportunity, because you didn’t have access to capital in order to take advantage of it.
Ronald A. Sneller, Jr. FICF, FSCP®, RICP®, RFC®
Registered Financial Consultant
Investment Adviser Representative
Ron Sneller is a fee-based financial consultant. A veteran of the financial services business for 10 years, he’s helped clients with their mortgages, insurance, investments, and retirement planning during that time.
Through education, empowerment, and action, Ron helps his clients take back control of their financial life to give them more clarity, focus, and security. You can reach him at: ronald.sneller@snellerfinancial.com
[1] https://www.cnbc.com/2021/07/08/wells-fargo-is-shutting-down-all-personal-line-of-credit-accounts-.html
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