Liquidity

 

Once you get into the habit of spending less than you make, you’ll need to decide what to do with some of the money you’re not spending.  It’s common for money that you can access pretty quickly to be referred to as liquid.  So when people refer to financial liquidity or liquid reserves, they’re talking about accessible money. 

 

It’s important for everyone to have a cash cushion for emergencies.  So some of the money that you’re saving should go into this emergency fund. 

 

Eventually, you’ll want to have at least 10% of your annual income where you can get to it quickly without any tax ramifications or other penalties.  This money can cover most of your standard unexpected financial needs like a car repair or a health insurance deductible. 

 

Then you’ll want another 20% of your income where you could get to it, but it might cost you some taxes or penalties.  This second savings stash is for less likely emergencies like losing a job or being out of work for an extended illness.  

 

If you’re self employed, you’ll want these liquid reserves to be bigger than if you have a regular job with a steady paycheck.

 

If you don’t yet own a home, you should be putting money away for a 20% down payment on a house.  More on that in a later posting.

 

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Some Financial Basics

If you’ve done your review of your 2007 spending, here are some items that you should see in the year’s finances.  (All of these assume you’re still in the work force.)

 

         You saved at least 10% of what you made.

         You have at least 10% of your pre-tax, pre-deductions annual earnings in savings. 

         You’ve funded retirement accounts.

         You didn’t spend more than you make, so you pay your credit cards off each month.

 

Give yourself a grade on each of these.  In the next posting we’ll look at how you can prepare for next year.