Welcome to the eighth issue of Metrix that Matter, a weekly newsletter from WEALTHMETRIX that helps you focus on what matters most for building and sustaining wealth. Every Saturday, we share an educational essay with actionable takeaways to guide you on your journey to financial independence.
What you’ll learn in this issue:
- What are liquid assets?
- The Goldilocks principle of liquidity
- The building blocks of healthy liquidity
- What good liquidity gives you
- How to calculate your Liquid Term score
How long could your cash savings maintain your current lifestyle if you lost your job tomorrow?
What if you needed to replace an air conditioning unit at your house? How would you pay for that?
Let’s say you want to buy a larger house to better accommodate your growing family. Where are you getting the cash for that down payment?
Having good cash reserves and liquid investments is one of the most valuable things you can do to improve your financial situation. Yet, these assets are often not prioritized enough. As you plan for major goals, such as retirement and college education, you also need to plan for short-term needs.
What are liquid assets?
In the financial world, something that is liquid is either cash or can be easily converted to cash.
Outside of the financial world, something that is liquid has the ability to flow freely like water.
When it comes to your finances, you need liquid assets that meet both definitions. Not only do you need assets that are cash or easily converted to cash, you also need assets that can flow freely between accounts.
In short, you need quick access to a portion of your assets at any time, for any reason, without penalty.
How much liquidity do you need? That depends greatly on your personal situation.
The Goldilocks principle of liquidity
Just like Goldilocks needed her porridge to be not too hot, not too cold, but just right, your liquidity needs to be not too little, not too much, but just right for your situation.
In practice, I’ve seen both ends of the spectrum. I’ve seen families with millions of dollars in retirement accounts and very little cash. I’ve also seen families with a million dollars in cash and no retirement assets. Neither situation is ideal.
The person with no cash reserves is one emergency away from financial disaster, forced to take costly withdrawals from retirement accounts, rack up credit card debt, or make desperate financial decisions that can take years to recover from.
The person hoarding cash in savings accounts is making a different mistake that can be just as costly. They're letting inflation slowly erode their wealth while missing out on potential growth opportunities and tax benefits.
The building blocks of healthy liquidity
So, what does "just right" look like?
Healthy liquidity is actually made up of two components that work together: cash and taxable investments.
Think of these as two different layers in your financial foundation, each serving a specific purpose.
Cash foundation
Let's start with cash. You've probably heard the standard advice: keep 3-6 months of expenses in an emergency fund. I prefer the higher end of that range (6 months), and here's why:
An emergency fund isn't just about buying time after a job loss. It's about being able to handle life's inevitable surprises without derailing your financial plan.
And in my experience, when it rains, it pours.
The month you lose your job is exactly when your air conditioning unit will decide to break down and your car will need major repairs.
Six months of expenses gives you a true buffer against Murphy's Law: anything that can go wrong will go wrong.
But your cash needs don't stop at emergencies. You also need to save for any short-term goals coming up in the next three to five years. This includes:
- Down payments (homes, vehicles)
- Anticipated major renovations or repairs
- Vacation funds
- Any other predictable large expenses
Accessible higher-growth investments
Once you've covered your emergency fund and short-term goals, any additional liquidity can move into taxable investment accounts. This is where you can take advantage of higher growth potential.
Unlike your retirement accounts, taxable investments give you complete flexibility. There are no contribution limits and you can access this money at any time, for any reason, without penalties.
Ultimately, this money bridges the gap between your immediate cash needs and your long-term retirement savings.
What good liquidity gives you
Having the right balance of cash and taxable investments changes how you experience money and life.
It gives you confidence. When you know you can handle whatever life throws at you, you sleep better at night. You're not constantly worried about the next unexpected expense or wondering if you'll be okay if something happens to your job. That mental freedom is invaluable.
It gives you real flexibility and opportunity. Good liquidity means you can take that new job opportunity even if it means a temporary pay cut. You can start that business you've been thinking about. You can make that investment when the right opportunity comes along. Instead of being reactive to financial emergencies, you become proactive about financial opportunities.
It protects your long-term wealth. When you have proper liquidity, you don’t have to make desperate financial decisions. You won't rack up high-interest credit card debt. You won't be forced to withdraw from retirement accounts early, paying penalties and taxes. You won't have to sell investments at the worst possible time. Your long-term wealth-building plan stays on track no matter what short-term challenges arise.
Most importantly, it gives you options. In an uncertain world, options are everything. The person with strong liquidity can weather economic downturns, take advantage of market opportunities, handle family emergencies, and make major life changes, all while staying on track toward their long-term financial goals.
Building proper liquidity takes time and discipline, but it's the foundation that makes everything else in your financial life possible. Without it, you're always one emergency away from financial hardship. With it, you have the stability and flexibility to build real, lasting wealth.
WHAT TO FOCUS ON THIS WEEK
Now that you understand the importance of proper liquidity, here’s a way to measure where you stand. This week, I want to introduce you to a metric that can quickly tell you whether your liquidity is "too little," "too much," or "just right".
Introducing Liquid Term
Your Liquid Term is simply the number of years your current liquid assets could cover your current living expenses. It's calculated like this:
Liquid Term = Total Liquid Assets ÷ Annual Living Expenses
Your liquid assets include:
- All cash accounts (checking, savings, CDs, money market)
- All taxable investment accounts
Your liquid assets do NOT include:
- Retirement accounts (401k, IRA, etc.)
- Real estate equity
- Business equity
Calculate Your Liquid Term
Let's walk through an example. Say you have:
$50,000 in cash accounts
$100,000 in a taxable brokerage account
$100,000 in annual living expenses
Your Liquid Term would be: ($50,000 cash + $100,000 taxable investments) ÷ $100,000 annual expenses = 1.5 years
This means your liquid assets could potentially cover 1.5 years of expenses.
What are healthy ranges?
Less than 0.5 (6 months): You're in the "too little" zone and vulnerable to financial emergencies
0.5 to 5.0 (6 months to 5 years): Generally healthy range for most people, depending on your situation
More than 5.0 (over 5 years): Very good liquidity. But if it’s all in cash, you might be in the "too much" zone and missing growth opportunities and/or tax benefits.
Your ideal Liquid Term depends on factors like income stability, family situation, and career stage, but this gives you a baseline to work from.
Take 10 minutes this week to calculate your Liquid Term. Then ask yourself: does this number make you feel secure, or does it highlight an area that needs attention?
ELEMENTS INVITATION
Thank you for reading. Understanding the metrics that matter for your wealth requires more than tracking individual pieces. You need to see how everything works together. That’s what Elements is designed to help you do.
Elements is a financial planning tool that organizes all your financial information in one place, then calculates the 11 key metrics that truly matter for building wealth. You'll see not just where you stand today, but how each metric relates to the others and impacts your overall financial trajectory.
Most importantly, Elements empowers you to make better financial decisions. When you understand how all the pieces fit together, the path to financial independence becomes much clearer.
If you're ready to gain this level of clarity and control over your financial situation, click the link below to get started with Elements. You'll answer basic questions about your income, spending, debt, and account values. The whole process takes about 10 minutes.
Once complete, we'll review your personalized scorecard and send you an email to schedule a complimentary 30-minute call to discuss your situation, answer any questions, and explore whether there's a fit to work together.
GET YOUR FINANCIAL SCORECARD IN 10 MINUTES
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