Tough Economic Times Call for More Liquidity

Liquidity is one of the most important factors when deciding on how to manage your financial assets. Tough economic times are usually temporary. During times like these, you should err on the side of caution and have plenty of liquid and non-volatile assets. This does not mean you need to turn into a gold bug. However, when deciding to pay down your mortgage, think twice. Should you need access to that money within 5 years, you should find a more liquid investment for your capital instead and keep making the minimum monthly payments.

The equity in your home is not liquid. This means that you simply cannot withdraw and use it anytime as if it were money in the bank. You must plan for the unexpected. You should always maintain some liquidity because there will inevitably be times in which you need cash fast.

There was a time where people believed that equity was almost equal to cash. In a healthy market, you would indeed be able to refinance or sell quickly to extract your equity. This is not the case anymore. It is much harder to quality for a refinance even if you have positive equity. Your credit must be very good and you need to prove your income has been steady for the last few years. In the current environment, you cannot assume that all of your home equity is readily accessible.

When the economic environment is good, people seldom need cash. And cash is much easier to borrow. This is especially the case when asset prices are rising. When the economy is contracting or at stall speed, it is a different story. Lending will often seize up and the capacity you had to borrow will also be gone. Most people take this for granted during the good times.

The harder times generally present the best opportunities. The real catch is that they are difficult to take advantage of. For example, real estate is a great buy in many regions today. At the same time, how many people can afford it right now? How many people are lendable especially for investment purposes? So, despite the enormous opportunities that exist, they are out of reach for many. The statement that bear markets present great opportunities for investors is only a half truth. This is only true to either a new investor or an investor that is buying that asset class with no prior holdings of it. This also assumes that you both have the ability to recognize the opportunity and the means to be able to afford it.

A cynic usually says that a bank will only lend you money when you can prove you don’t need it. This has been quite true at times.

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