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Why liquidity might actually be important for you

POSTED ON DECEMBER 24, 2021    

Liquidity is how easy or difficult it is to turn your investment into cash. That’s why you should consider this factor when choosing an investment to put your money into.

But how important is it for you? Should you only invest in products that are highly liquid or is not a big deal? The answer: it depends on a few things.

 

Staying short or going long

If you can’t keep your money invested for long, liquidity should matter a lot to you. If you’ll probably need the money in the near future, you wouldn’t want to have a hard time turning your investment into cash (or possibly have to take some losses to do it quickly).

If you plan to stay invested for a long time, on the other hand, you probably shouldn’t make liquidity the primary consideration. That’s because you’ll probably have more than enough time to choose when to pull your money out when you finally need it.

 

Return potential

In general, products that are considered very liquid do not have the potential to earn you a lot of money. This is something you need to keep in mind when choosing an investment.

Is high liquidity worth the possible profit tradeoff? Only you can say for sure, but remember that the lower return potential could make it difficult to reach your money goal. That is, unless your time horizon is long enough for you to get the right amount of returns.

 

Need for speed

Lastly and most importantly, if there is a strong chance that you’ll need to pull your money out quickly, liquidity should be one of your top concerns.

Even though the difference between a highly liquid investment and one that is not as liquid could just be a matter of days, it could still be important enough for the first product to be the right choice for you.

Remember though that before you start investing, you should already have an emergency fund that contains 3 to 6 months’ worth of your essential monthly expenses. That will help you follow your investing strategy in case something bad suddenly happens.

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