If you're a therapist and want to grow your impact - or you simply want to reduce financial anxiety - today's post is for you. We're going to talk about the idea of liquidity - and why it just might be the financial goal more people should be focused on!
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Today we're going to talk about liquidity.
But before we dive into the nuance of what liquidity actually is, let's take a step back and talk about your life first. Because, as a wise woman once told me, people don't truly have financial goals, they have life goals with financial implications.
What life goals can liquidity help support? Maybe you want to grow your impact. You want to write a book, or start a podcast or maybe even design an online course. Or perhaps you're simply looking to reduce your financial anxiety. Maybe you've got expenses or student loan debt hanging over your head. Whatever it is, you're a tired of constantly having to think (and worry) about money.
What do you need in both of these situations? You need a bit of flexibility and space. You need some breathing room! Liquidity can offer you that space: time to write that book, time to develop that podcast or time to build that online course. Or simply more time to develop a more intentional financial strategy - so you don't have to be rushing to put out financial fires.
Liquidity to the Rescue!
Liquidity might be the fastest way to make your life better - and put you on the path to accomplishing those things most important to you.
We all want to be making smart financial moves. But too often I see people chasing generic, one-size-fits all financial goals. Focusing on funding retirement accounts or saving up for a downpayment on your first home. These are both popular and reasonable-sounding goals. But if you blindly pursue these goals you might be doing yourself a disservice.
Personal finance is just that - personal. The right financial goal for you may well be different than the right goal for the therapist down the road (or in that FB Group with you).
So let's talk about what liquidity and how that might be the right top-priority financial goal for you.
Huh, what's liquidity?
We could quibble about what the technical definition of liquidity is, but who has the time. I think Investopedia offers a great definition for our purposes:
Liquidity refers to the efficiency or ease with which an asset or security can be converted into ready cash without affecting its market price. The most liquid asset of all is cash itself.
That sounds a little complicated, but all it's really hitting at is how easily can you turn any given asset you own into cash.
Things like banking accounts and money market accounts - super easy to convert to cash. They really already are cash. Investments held outside of retirement accounts - very easy to turn into cash. Sure, you have to sell the investments you hold, and those investments do fluctuate in value, but you can get your hands on that cash within a day or two.
In contrast, think about things you might own that have low liquidity - they are pretty difficult to turn into cash quickly. Those are things like real estate you own, such as your home. There are a lot of steps (and a lot of time!) required to turn your house into cash. And you'll have to pay fees and transaction costs along the way: you probably will hire a real estate broker, and there may even be transaction taxes you need to pay.
Similarly, whatever money is in your retirement account isn't really liquid. Admittedly, your retirement account contains the same type of investments that you might hold in a regular taxable account, but you don't have access to those funds until, well, you're retired (or at least around age 60). Yes, you can take money out of retirement accounts in limited circumstances before age 60, but in most cases you'll be hit with taxes and early withdrawal penalties.
So you might be thinking, "Great, I get what liquidity means - but so what, who cares?!"
Liquidity: The Anxiety-Slaying Life Hack
When you have liquidity - when you have liquid assets - you have quick access to cash. That cash can create flexibility for you - it can open up space and create time for you. You don't have to worry about adding one more client to your busy week. Or you can step away from client work a bit to focus on your book, podcast or course. Or you just have more time to make good decisions - you don't have to feel under the gun of financial anxiety all the time.
Life happens. Unexpected expenses always have a way of showing up. Sometimes we need to step away from earning income with little warning. If you have sufficient liquid assets to rely on when these things happen, you literally will sleep better at night. Without adequate liquidity, you may find yourself up all night worrying if you need to start driving for Uber, take out a second mortgage or rack up credit card debt just to get by.
Liquidity gives you time to take a breath and make thoughtful decisions about the future. If you're under tremendous emotion strain, you won't be doing your best thinking - it simply isn't possible. And you may end up making some decisions you look back on with regret. Liquidity can help prevent that from happening.
Of course to grow liquidity, you need to have a financially healthy private practice. If your private practice isn't providing that healthy cash flow for you, that's likely the right place to begin. (And a good time to check out my Finance Quick Start Guide for Therapists! 👇)
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"Having Cash = Good" Might Feel a Bit Obvious
This idea of liquidity and that having cash is good might seem rather self-explanatory and even a bit obvious. And perhaps it is.
But I often see folks pursuing financial goals that reduce their liquidity - even when that doesn't truly serve them. Why? I suspect because the conventional financial goals that we see other "financially smart" people pursuing are seductive. Let's look at two of the most common.
"Buy a house as soon as you can." 🤨
This is common piece of financial wisdom. "Buying a house is the smartest financial decision." "Renting is throwing money away." I don't think either of those statements are true - at least not all of the time. But even if they were, buying a house only makes sense if you don't need more liquidity to accomplish your life goals.
If you're focusing your financial resources on purchasing a house, you're actively looking to reduce your liquidity - and with it your financial flexibility. That might be ok - but really think about what you want your life to look like - both now and in the future. If you value flexibility of time and reduced financial anxiety - buying a house is quite possibly not the right goal for you right now.
I'll explore the financial myths of home ownership in a future post, but for now just know that home ownership isn't the end-all-be-all of personal finance. You don't need to own a home to be financially successful, stable or astute. Focusing on more liquid investments, such as through an ordinary, non-retirement brokerage account are just as (if not more) likely to yield a positive returns AND they preserve easy access to your hard-earned cash in case you need it.
"Max out your retirement accounts." 🤨
This is another piece of advice I hear thrown around quite a bit.
Is funding your retirement a solid financial goal? Yes, of course - in virtually all cases this is a good idea. But should you focus on funding retirement accounts to the exclusion of caring for your other financial goals? I sure don't think so.
Remember for most retirement accounts, the money you put away cannot be easily accessed until you're around 60 years of age. It often makes sense to put some of your savings in these types of accounts. But it usually isn't wise to put all of your savings out of your reach. I suggest you carefully think through your overall financial priorities before contributing a high percentage of your savings into a retirement plan.
Building Liquidity Can be an Excellent Top-Priority Financial Goal 😃
If it doesn't feel right to max out your retirement accounts or commit to buying a house, that's fine! Building a solid level of liquidity is oftentimes one of the best financial goals you can set for yourself. Consider building up a three to six month emergency fund in a checking account or money market fund. Beyond that, you might invest in a normal brokerage account (sometimes called a taxable account). That taxable account might hold a somewhat more conservative allocation of assets to guard against loosing too much money in the event of a market decline.
And you may still be allocating a (smaller) chunk of your savings to retirement or a house downpayment. But it's more than ok if those aren't the priorities for you right now!
The Bottom Line: Personal Finance is Always Personal!
The bottom line is that personal finance is personal. Think about what you want to accomplish in your life - whatever that is. Your personal life goals might include having the flexibility to grow your income in new, even entrepreneurial ways. And that might require you to reduce your near-term earnings. Or you might just want to reduce your financial anxiety. And that is an entirely valid (and in my opinion excellent) financial goal.
When you get clear about what you want for your life, the right financial moves for you will become clear. And it might require setting aside some of the conventional pieces of financial wisdom you read about online. And that's ok.
That's a Wrap 🎬
Alright, I hope you found this post helpful! This was a LOT of information. So, let me know if that avalanche of information was helpful! What made sense, and what points are still confusing? What else would you like to hear about that would be helpful? Give me a shout and lemme know!
And if this all feels a bit much, give me a shout. I work one-on-one with therapists from all over the country helping them address issues just like the ones we talked about today! There are a bunch of different ways to work with me which I describe on my services page.
Turning Point is a registered investment advisor in the state of California. Please visit turningpointhq.com for important information and additional disclosures. This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes financial, legal or tax advice; a recommendation for purchase or sale of any security; or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Read the full Disclaimer here.