How Liquid is Your Net Worth?

When someone wants your money, they offer you an interest rate and lock up your money for a few years so that they can invest your money elsewhere in peace! If you want 80C tax benefits, your money will get locked in for a few to several years (min 3Y in ELSS  to max. when you turn 60 in NPS!).

There are many who suggest products with long lock-in periods (tax-free bonds, PPF, Sukanya acct. endowment policies...) to people who don't have financial discipline. They argue that the lock-in period combined with tax benefits or the necessity to pay premiums will enable them to build a corpus.

When it comes to compounding, the number one enemy is premature withdrawals.

Those who desire instant gratification tend to interrupt  compounding repeatedly by withdrawing from their corpus.

A lock-in prevents this, but like everything else in life, when there is a pro, there tends to a con.

Although recommending such products with long lock-in periods is done with good intentions, there is a huge danger associated.

'What is my net worth?' is not as important as 'How is my net worth' or rather, 'How liquid is my net worth?'.

When we go about taking control of our financial lives,

  • we set up an emergency fund,
  • buy life, health, accident and perhaps critical illness insurances.
  • we figure out how much we can invest for our short-term long-term and recurring goals
  • then we go about investing

The most implicit assumption in any financial plan is that investments will continue and the corpus will grow untouched until it is time for the intended expense.

Trouble is, no matter how big your emergency fund is, how big your health, accident, and critical illness covers are, you and your family can never be insulated against all the googlies and doosras of life.

I can give you several examples, but will stop with just one and urge you to work your imagination: health insurance maybe for all dependents but accident and critical illness covers are typically taken only for breadwinners.

The sad reality of life is that, we may need large sums of money at any point in life due to a wide variety of unanticipated expenses.

There is one thing you can do in preparation: not lock up all your money in illiquid assets.

lock-in-period
Photo Credit: Bilal Kamoon (flickr)

This is where mutual funds (equity +debt) and direct equity score over all others. They are productive and tax efficient in the absence of any redemption pressure and can be redeemed within a few days, perhaps with an expense load, which is not a priority at that point.

Do not lock-in your money by maxing investments in PPF, Sukanya account, National Pension Scheme etc.

Do not buy too much of real estate.

If you have unexpected big-ticket expenses, you could be in deep trouble.

How liquid you net worth is, decides how useful your net worth is.

Before you dismiss this post as too pessimistic, as mentioned above, please work your imagination to see what I am referring to.

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27 thoughts on “How Liquid is Your Net Worth?

  1. TEJASH

    dear writter, very helpful article, the line i am following since long time but not have proper sentence is "How liquid you net worth is, decides how useful your net worth is".

    keep posting
    thanks

    Reply
  2. TEJASH

    dear writter, very helpful article, the line i am following since long time but not have proper sentence is "How liquid you net worth is, decides how useful your net worth is".

    keep posting
    thanks

    Reply
  3. Melvin Joseph

    Fully agree dear Pattu. We should invest in instruments where we have full control at all stages of life. This is where mutual funds (combination of equity and debt funds ) score over.

    Reply
  4. Melvin Joseph

    Fully agree dear Pattu. We should invest in instruments where we have full control at all stages of life. This is where mutual funds (combination of equity and debt funds ) score over.

    Reply
  5. bharat shah

    you are very true. liquidity is the most important , so insurance+saving product is not even to look at, leave the return part! this i learnt first from 'wonderland of investment ' by Shri A N Shanbhag in eighty.

    Reply
  6. bharat shah

    you are very true. liquidity is the most important , so insurance+saving product is not even to look at, leave the return part! this i learnt first from 'wonderland of investment ' by Shri A N Shanbhag in eighty.

    Reply
  7. Raghavendra Kalmadi

    Thanks Pattu for this thoughtful article. Any suggestion on what % of net worth should in liquid assets that can be liquidated when the need arises?

    Reply
  8. Raghavendra Kalmadi

    Thanks Pattu for this thoughtful article. Any suggestion on what % of net worth should in liquid assets that can be liquidated when the need arises?

    Reply
  9. Rakesh

    Excellent article. One rule that i follow is that RE is not considered in my Net Asset and goals that is needed within the next 10 years. Even in RE, the house i live is NEVER considered for any of my financial plan. Consider it as an expense (for upkeep etc). Among the rest of the asset classes, over the years i have staggered my FDs so that every month or 2 some FDs mature (again i dont spend too much time, because banks automatically renew the FDs, and in case i need to rebalance any time, i will have funds maturing). As you rightly pointed equity MF is the most liquid and in case of unexpected emergency i can quickly liquidate some part of investments. I do have a separate emergency fund which is in SB accounts (laziness has prevented me putting it into some form of liquid funds, but not too worried about it)

    Reply
  10. Rakesh

    Excellent article. One rule that i follow is that RE is not considered in my Net Asset and goals that is needed within the next 10 years. Even in RE, the house i live is NEVER considered for any of my financial plan. Consider it as an expense (for upkeep etc). Among the rest of the asset classes, over the years i have staggered my FDs so that every month or 2 some FDs mature (again i dont spend too much time, because banks automatically renew the FDs, and in case i need to rebalance any time, i will have funds maturing). As you rightly pointed equity MF is the most liquid and in case of unexpected emergency i can quickly liquidate some part of investments. I do have a separate emergency fund which is in SB accounts (laziness has prevented me putting it into some form of liquid funds, but not too worried about it)

    Reply
  11. Anand Vaidya

    Liquidity is a boon for those who can control their behaviour.

    I know a person who does not have Rs 500 (bank balance=0) in the last week of the month and then withdrew ULIP prematurely, at a 30% loss, to go on a trip. Go figure.

    Reply
  12. Anand Vaidya

    Liquidity is a boon for those who can control their behaviour.

    I know a person who does not have Rs 500 (bank balance=0) in the last week of the month and then withdrew ULIP prematurely, at a 30% loss, to go on a trip. Go figure.

    Reply
  13. Jagan Tarigoppula

    Excellent article by Pattu sir. This article once again reminded me to review my assets, liabilities and goals. Thank you for publishing this.

    Should we keep liquid assets equal to minimum 6 months of expenses? Are there any other thumb rules?

    Reply
  14. S.K Ray

    Dear Pattuji,

    Your articles are very lucid and informative. they cover every aspect of financial planning . I am a regular follower of yours. Please keep on writing!!!!.
    Thanx

    S.K Ray

    Reply
  15. Vaibhav D

    Sir,
    your blog is extremely educative. thank you for such great efforts. I want to make a point regarding liquidity here. What if market is down when i want to withdraw my mf investments for emergency? Wont that affect my returns?
    Also, i find it very useful that i can take a loan on my LIC policy during an emergency. But this loan is only a certain part of my investment and i have to pay high interest on it.(around 10 pc). But the process is simple and doesn't affect my policy in any other way.

    Thank you.

    Reply
  16. AG

    I am wondering how MFs will provide me liquidity if I need it in emergency (lets say at midnight). I need to wait for market to open next day and I will get the funds in my account in a day or two. Am I missing something here?

    Reply

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