Building real wealth starts with a strong financial plan & smart investing. These investments should be comprised of a diversified portfolio designed to help you build long-term wealth. But what if you need money quickly? For most Canadians, up to 75% of their net worth is tied up in non-liquid assets like real estate, which can take time to sell.
While it’s possible to withdraw funds from your investment portfolio it is not the best choice, that is why it is so important to have liquid assets included in your financial plans.
What is a liquid asset?
Liquid assets can include “cash on hand” or assets that can easily be converted to cash and are readily accessible. For an asset to be deemed “liquid” it must be in an established market with a large number of potential buyers AND have ownership that is easily transferable.
What is considered a liquid asset?
Everyone has heard the expression “Cash is king”. This was true long before technology like debit & credit cards existed, and still stands true today. I always recommend that my clients have some cash at home (securely stored of course), on their person and in their bank accounts to cover all the bases. Debit machines and computers do go down on occasion, so it’s important to ensure you enough cash to cover any unexpected emergencies. Further, it’s recommended to have approximately 3 months’ worth of bill expenses in your bill paying bank account and 3 months’ worth of salary or wages in a high interest bank account to make sure you’re supported should you find yourself without work.
Precious Metals and Jewelry
Assets like gold, silver and jewelry can be converted into cash quite quickly. However, they may be sold at a discount and be subject to fees.
Other liquid assets which can be made available, although not always recommended, is the cash in your investment portfolios such as RRSPs, TFSAs and Non-Registered accounts. This would be for extreme emergencies only, as withdrawing funds early from locked-in accounts means they may be subject to taxes and fees, and you would also be losing all future growth of the assets that are withdrawn. This is referred to as a lost opportunity costs.
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Life Insurance Cash Values
Participating life insurance policies have a cash value that can be withdrawn. However, the preferred method would be to borrow the funds. This can be done without any approval requirements from the insurance company, and it is only a matter of signing a withdrawal form. These funds can be used for emergencies or to take advantage of an investment opportunity that may present itself. Although structured as a loan, it is very similar to borrowing the equity from your home. These loans are technically a “non-recourse loans,” meaning you do not have to pay the loan back. Interest on the borrowed funds will continue to accrue and will be deducted at the time of death from the total life insurance values.
Assets that are not liquid:
The following assets do have real value and can be sold for cash. However, the time it takes to sell real estate or your business for a fair value may take months or even years. You may be able to sell these assets in a shorter time frame, but you may have to do it at a significant loss. Selling your non-liquid assets because of an emergency should only be considered if there are no other options. These assets include:
- Principal Residence
- Investment Real Estate
Why are liquid assets important?
I am a strong supporter of having real cash; both on my person as well as some emergency cash at home. I recommend to my clients have at least $1000 of “rainy day” cash just in case, in addition to their liquid assets. Maintaining at least some portion of your net worth as “liquid assets” is a vital part of your financial plan. Life is unpredictable and there are many reasons you might need fast cash. Each situation is definitely unique, and could range from covering expenses short-term during a slow season at work, to larger expenses like legal fees or big purchases you need to make in order to grow your business. You never want to be caught in a situation where you’re forced to wait on accessing your savings or face a loss in their long term value because you have to sell non-liquid assets abruptly.
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