How liquidity saves Indian households in financial emergencies
What's the story
Liquidity is the unsung hero of personal finance, often overlooked until a financial crisis strikes. It's the ability to turn assets into cash quickly and without losing value. For Indian households, liquidity implies having the means to handle unexpected expenses or take advantage of opportunities without disrupting long-term financial plans.
Emergency fund
Importance of an emergency fund
An emergency fund is the foundation of financial liquidity. Financial experts advise keeping a minimum of three to six months' worth of living expenses in a readily accessible account like a savings account or a liquid mutual fund. This fund serves as a financial cushion, preventing you from falling into debt during emergencies like medical emergencies or unexpected job loss.
Liquid assets
Choosing liquid assets
Not all assets are created equal when it comes to liquidity. Savings accounts provide easy access but low returns, while real estate offers great returns but is harder to sell quickly. Indian households need to diversify their assets, maintaining funds in both savings and mutual funds. This way, you have money available when you need it, but you're not missing out on growth.
Market trends
Understanding market conditions
Unfavorable market conditions can make certain investments much harder to sell. For example, stocks become less liquid during bear markets, as fewer people are interested in buying them. By keeping an eye on market trends and understanding how they affect the liquidity of your investments, you can make smarter decisions about when to buy or sell.
Ratio analysis
Liquidity ratio: A handy tool
The liquidity ratio is a measure of financial health, comparing liquid assets to short-term liabilities. A ratio of one-to-one means you have enough liquid assets to meet your immediate liabilities. Striving for a higher ratio provides additional peace of mind. By regularly calculating this ratio, Indian households can proactively manage their finances, making sure they always have enough for a rainy day.