What is liquidity?
Liquidity simply means the availability of money when you need it.
Many times, what happens when we have excess liquidity (more money than required) is that we just simply invest the excess liquidity in the form of fixed deposits in banks, invest in shares or bonds, invest in real estate, and in various other forms. But what happens in case of an emergency when we quickly need some money is a lack of liquidity (non-availability of money when required). So to overcome these kinds of situations, there are various ways to manage liquidity. Some of them are as follows:
· Loan against deposits or investments
· Avail credit card facility
· Small fixed deposits with different maturities
· Establish emergency fund
· leverage technology
1) Loan against deposits or investments.
Loan against FD or investments is one of the ways to manage your short-term liquidity crunch. In this way, you just have to take a short-term loan against your deposits or investments. In this way, you just have to bear a minimum interest expense on the loan amount until you get financially stable.
Example: Mr. X has an urgent need for money, but he doesn’t have cash because he put all his money in an FD one month ago. So, what he can do is simply apply for a loan against the FD. He can manage with minimum interest expenses and repay when he becomes financially stable.
2) avail credit card facility
Credit cards can provide a safety net, but mishandling them can strain your finances. Smart credit management means borrowing only what you can afford to pay back and choosing low-interest options.
If you need to use credit, consider rewards cards that align with your typical spending patterns, providing potential cashback or travel rewards. Establish a repayment strategy to pay off balances each month to avoid interest fees. According to the Consumer Financial Protection Bureau, about 40% of adults carry a credit card balance. Keeping your credit healthy can save you money in the long run and ensure you have access to credit when needed.
3) Small fixed deposits with different maturities
This is one of the finest ways to keep your money safe with constant liquidity.
Example: Mr. X wants to make an FD in such a way that he can maintain liquidity. So if he has Rs 500,000 in his account, rather than putting all his money in one FD, he should put this money in multiple FDs with different maturities, like the 1st FD for 2 months, the 2nd FD for 3 months, and the 3rd FD for 4 months, so that he can receive a constant amount at the end of each month.
4) Establish an Emergency Fund
Picture this: an unexpected expense arises, and your cash flow is already tight. Having an emergency fund is your safety net.
Even setting aside 10% of your income can build a health cushion over time. The general recommendation is to save three to six months' worth of living expenses. For instance, if your monthly expenses are Rs 5000, try to save between Rs15000 to Rs 30000. This fund acts like a financial superhero, ready to save you from tough situations.
creating an emergency fund may take time, but when an unexpected bill hits, or a job loss occurs, you will be grateful for this safety net.
5) Leverage Technology
In today's world, using technology effectively can streamline liquidity management.
There are numerous software options and apps that help track finances, manage invoices, and forecast cash flow. For example, accounting software like QuickBooks or Xero assists in organizing your financial data and provides real-time insights. Some platforms even send alerts when bills are due or when cash balances are low, helping you stay ahead of the game.
Investing in these tools may feel like a cost now, but they can save you hours and money in the long run by making cash management easier.
Final Thoughts
Managing liquidity doesn't need to be complex. By understanding your cash flow cycle, optimizing inventory, establishing an emergency fund, negotiating payment terms, and leveraging technology, you can improve your cash flow significantly.
Implementing these strategies can give you greater control over your finances and position you for sustained success. Why not give them a try? Your future self will be grateful!
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