Of Goose and Gold: The Illiquidity Trap

Last time, we talked about the possibility of a goose that can lay golden eggs, in the form of passive income. This goose comes about from the discipline and hard work of saving. Thus, it was argued that savings should not come about from a “tira” mentality, but from a mindset that savings is an initial payment to the self.

Capitalizing on this concept, many financial institutions and businesses have embarked on campaigns to encourage people to invest. Walking along the malls, one can see and hear people dressed in business attire handing out flyers for condominiums as investment options with low monthly payment plans. Banks are also encouraging people to invest by lowering required initial investments. Although investing seems to be the next logical step after saving, two important aspects to financial health are often overlooked: debt management and liquidity.

RELATED: Of Goose and Gold (Part 1)

Liquidity is defined as the measure of the extent to which a person has cash or liquid assets on-hand to meet short-term obligations. But stretching the definition further, liquidity can be understood in simple terms as having enough money to meet both basic needs and cover emergency situations. This is important as many young workers who start investing forget to build a pool of funds to tap in case of emergencies. Thus, when these emergency situations arise, these young investors are forced to liquidate or sell their investments, even for very low prices, due to the need for funds.

Thus, before beginning on an investment journey, it is important to build a pool of funds which can be tapped for emergency situations. The amount in this fund would vary on your own situation. For instance, if you have immediate family approaching retirement and are at risk for certain health problems, then you may need to build a larger pool. If you have a small family with young children, then a pool to pay for tuition fees and other children-related expenses would be needed. This pool of funds can be a source of peace of mind, especially when emergencies arise, and at the same time, it can prevent you from sinking into debt and prematurely liquidating investments at losing prices.

But what if you are plagued by bad debt? The goose that lays golden eggs cannot thrive in an environment of bad debt. Thus, the next piece will talk about debt management.