Liquidity - Why Access to Cash Matters

⚠️ Why Illiquid Wealth Can Be Risky

The "Asset-Rich, Cash-Poor" Problem

What It Means:

Having significant wealth tied up in assets that can't be quickly converted to cash. On paper you're wealthy, but in practice you struggle with daily expenses or emergencies.

Common Scenarios:

1. Property owners with no cash:

• Own $1M+ property mortgage-free
• But zero savings, living paycheque to paycheque
• Can't pay $5k unexpected expense without borrowing

2. Business owners:

• Business worth $500k on paper
• All capital tied up in equipment, inventory, accounts receivable
• Personal account often empty

3. Young professionals with KiwiSaver:

• $100k in KiwiSaver (locked until 65)
• Good income but no savings buffer
• Job loss = immediate crisis despite $100k "wealth"

Risks of Low Liquidity

Risk 1: Emergency Expenses

Emergencies don't wait:

• Medical expenses (dental, urgent care)
• Car breakdown (need car for work)
• Appliance failure (fridge, washing machine)
• Home repairs (burst pipe, broken heater)
• Vet bills

If no liquid assets:

• Must use credit card (18%+ interest)
• Take payday loan (extremely expensive)
• Borrow from family (strain relationships)
• Go without (worsens problem)

Risk 2: Income Loss

Job loss or income reduction:

• Rent/mortgage still due monthly
• Bills don't stop
• Food, transport still needed

If illiquid:

• Can't access home equity quickly (takes weeks)
• Can't withdraw KiwiSaver (except hardship - long process)
• Selling investments in falling market = losses
• Miss mortgage payments → penalties, potential foreclosure

Risk 3: Forced Sales at Bad Prices

When need cash urgently:

• Must sell assets under pressure
• Accept lower prices (can't wait for better offers)
• Lose negotiating power
• Selling costs eat into proceeds

Examples:

• Property: Normal sale $850k, distress sale $780k = $70k loss
• Car: Worth $20k, urgent sale $14k = $6k loss
• Shares: Sell during market panic = lock in losses

Risk 4: Missed Opportunities

Time-sensitive opportunities require cash:

• Discounted investment (must act quickly)
• Property below market value (cash buyers preferred)
• Business opportunity
• Bulk purchase discounts

Wealthy but illiquid = watching opportunities pass by.

Property vs Cash

Why Property is Illiquid:

NZ property sale timeline:

• Prepare house (repairs, staging): 2-4 weeks
• Marketing period: 3-6 weeks
• Negotiations: 1-2 weeks
• Due diligence (building reports, LIM): 2-3 weeks
• Finance approval: 2-3 weeks
• Settlement: 4-6 weeks
• Total: 3-6 months typical

Costs of selling:

• Real estate commission: 3-4% + GST (~$35k on $900k house)
• Legal fees: $2,000-3,000
• Marketing: $2,000-5,000
• Total costs: ~$40k+ to sell

The Equity Trap:

Example: Mortgage-free homeowner

• House value: $800,000
• Mortgage: $0
• Equity: $800,000

But...

• Need $10,000 cash for emergency
• Options:
• Can't sell 1.25% of house (must sell whole thing)
• Reverse mortgage: High interest, reduces equity
• Home equity loan: Application takes 2-4 weeks
• Sell house: 3-6 months, huge costs
• $800k equity but can't easily access $10k

Cash vs Property Comparison:

🚨 Emergency Planning and NZ Scenario

Emergency Planning Requires Liquidity

Why Emergency Funds Must Be Liquid:

• Emergencies are unpredictable (timing, amount)
• Need access within days, not months
• Can't afford forced sales at bad prices
• Illiquid wealth doesn't help in crisis

Appropriate Emergency Fund Locations:

Best (immediate access):

• High-interest savings account
• Transaction account (though earns little interest)
• Instant access term deposits

Acceptable (quick access):

• Short-term deposits with break penalties
• Money market funds

Poor (too slow/risky):

• Shares (might need to sell in falling market)
• Property (way too slow)
• KiwiSaver (locked, hardship withdrawal is long process)
• Fixed assets (vehicles, collectibles)

Recommended Liquidity Levels:

By employment type:

• Stable employment: 3-6 months expenses
• Single income household: 6 months expenses
• Self-employed/contractor: 6-12 months expenses
• Retired: 12-24 months expenses

Example calculation:

• Monthly expenses: $5,000
• Target: 6 months
• Emergency fund: $30,000 in liquid savings

NZ Scenario: Margaret, Asset-Rich Cash-Poor Retiree

Background:

• Margaret: 68, retired teacher in Auckland
• Widow, living alone
• Worked hard, paid off mortgage decades ago
• Always believed "own your home = financial security"

Margaret's Financial Situation:

Assets:

• House (Mt Eden, 3-bedroom): $1,200,000 (mortgage-free)
• Car (2015 Camry): $12,000
• Household contents: $25,000
• Savings account: $2,000
• Total assets: $1,239,000

Income:

• NZ Super: $800/week ($3,467/month)
• No other income

Expenses:

• Rates: $320/month
• Insurance: $180/month
• Power: $150/month
• Groceries: $600/month
• Petrol: $120/month
• Health (doctor, prescriptions): $100/month
• Phone/internet: $90/month
• Maintenance/repairs: $200/month (average)
• Other: $300/month
• Total: $2,060/month

Monthly surplus: $1,407 (goes to living expenses, small treats)

The Crisis - Three Hits in Two Months:

January - Roof leak:

• Heavy rain reveals roof needs repairs
• Roofer quote: $3,500
• Margaret's savings: $2,000
• Shortfall: $1,500

February - Car breakdown:

• Transmission fails
• Repair quote: $2,800
• Needs car for shopping, medical appointments
• Margaret's savings (after roof): $0
• Must find: $2,800

March - Rates bill:

• Annual rates: $3,840 due
• Could spread over year but forgot to set up
• Need: $3,840

Total cash needed: $10,140

Margaret's Options (All Poor):

Option 1: Credit card

• Can borrow $5,000 limit
• Interest: 19.95%
• Still short $5,140
• Creates ongoing debt at retirement

Option 2: Reverse mortgage

• Borrow against home equity
• Interest rate: 7-9% compounding
• Reduces eventual estate value significantly
• Application takes 3-4 weeks

Option 3: Borrow from family

• Adult children may help
• But strains relationships
• Feels like failure after lifetime of independence

Option 4: Sell house

• Would solve problem but...
• Takes 3-6 months (bills due now)
• Would need to move (emotional attachment)
• Huge overreaction to $10k problem

What Margaret Realized:

• $1.2M house equity completely useless for $10k emergency
• "Wealthy" on paper but vulnerable in practice
• Should have maintained liquid emergency fund despite owning house
• Liquidity ≠ net worth

Margaret's Solution:

• Took reverse mortgage for $15,000
• Paid immediate bills
• Put $5,000 in savings account (future emergency fund)
• Now rebuilding savings: $200/month from NZ Super surplus
• Goal: $10,000 liquid emergency fund within 2 years
• Learned: Asset wealth without liquidity = vulnerability

✅ Liquidity Planning Checklist

Assessing Your Liquidity Position:

Step 1: Calculate Liquid Assets

• ☐ Cash on hand: $______
• ☐ Transaction accounts: $______
• ☐ Savings accounts: $______
• ☐ Term deposits (breakable): $______
• ☐ Shares (liquid, can sell quickly): $______
• ☐ Total liquid assets: $______

Step 2: Calculate Monthly Expenses

• ☐ Housing (mortgage/rent, rates, insurance): $______
• ☐ Utilities (power, water, internet, phone): $______
• ☐ Food and groceries: $______
• ☐ Transport (car, petrol, public transport): $______
• ☐ Health (insurance, prescriptions): $______
• ☐ Other essential: $______
• ☐ Total monthly expenses: $______

Step 3: Calculate Liquidity Ratio

• ☐ My liquidity ratio: ______ months
• ☐ Target based on situation:
• Employed, dual income: 3-6 months
• Single income household: 6 months
• Self-employed: 6-12 months
• Retired: 12-24 months
• ☐ Am I meeting my target? Yes / No

Step 4: Identify Illiquid Assets

Assets I own but can't quickly convert to cash:

• ☐ Property/real estate: $______
• ☐ KiwiSaver (locked): $______
• ☐ Business equity: $______
• ☐ Vehicles: $______
• ☐ Collectibles/valuables: $______
• ☐ Total illiquid: $______

Illiquid-to-liquid ratio:

• ☐ Illiquid assets ÷ Liquid assets = ______ : 1
• ☐ If ratio > 10:1, very vulnerable (much wealth tied up)

Warning Signs of Liquidity Problems:

• ☐ High net worth but struggle with unexpected $1,000 expense
• ☐ All wealth in property/KiwiSaver, minimal savings
• ☐ Using credit cards for emergencies despite owning assets
• ☐ Can't take advantage of opportunities due to no cash
• ☐ Stress about bills despite being "wealthy on paper"
• ☐ Liquidity ratio under 3 months
• ☐ No accessible funds except retirement accounts

Action Plan to Improve Liquidity:

Short-term (1-3 months):

• ☐ Redirect savings to high-interest account (build emergency fund)
• ☐ Set up automatic transfer: $______ per pay to liquid savings
• ☐ Break term deposits if needed (pay penalty but gain liquidity)
• ☐ Sell non-essential illiquid assets (second car, unused items)

Medium-term (3-12 months):

• ☐ Build emergency fund to 3-6 months expenses
• ☐ Review asset allocation - rebalance toward liquidity
• ☐ Set up home equity line of credit (backup, don't use unless needed)
• ☐ Reduce illiquid investments until liquidity adequate

Long-term (1-2 years):

• ☐ Maintain permanent liquidity buffer (never dip below 3 months)
• ☐ Balance wealth building (property, KiwiSaver) with liquidity needs
• ☐ Annual review: Is liquidity ratio still adequate?
• ☐ Adjust as life changes (retirement, kids, job change)

Special Considerations:

If primarily property wealthy:

• ☐ Consider home equity loan (access equity if needed)
• ☐ Downsize to release cash (if property wealth excessive)
• ☐ Rental income from property (creates cashflow)
• ☐ Never let liquid reserves drop to zero

If locked in KiwiSaver:

• ☐ Remember: Can't access until 65 (except first home, hardship)
• ☐ Don't count KiwiSaver as emergency fund unless near 65
• ☐ Build separate liquid emergency fund
• ☐ Balance KiwiSaver contributions with liquidity needs

If self-employed:

• ☐ Higher liquidity target (6-12 months)
• ☐ Separate business and personal emergency funds
• ☐ Income smoothing account for irregular earnings
• ☐ Don't tie up all capital in business assets

Final insight: Liquidity is how quickly you can convert assets to cash without major value loss. Spectrum from cash (instant) to property (months). Assets vs liquid assets: can have high net worth but poor liquidity - "asset-rich, cash-poor." Why illiquid wealth risky: emergencies need cash now, can't wait months to sell property, forced sales at bad prices lose value, bills don't wait for asset sales. Property vs cash: house worth $800k takes 3-6 months to sell with $40k+ costs, meanwhile need liquid funds for immediate expenses, can't sell 1% of house (must sell whole or borrow). Emergency planning requires liquidity: emergency funds must be in accessible form (savings accounts, short-term deposits), KiwiSaver locked until 65 (not emergency fund), property unusable for emergencies. Margaret retiree scenario: $1.2M mortgage-free home, $2k savings, three emergencies totaling $10k, couldn't access home equity quickly despite huge asset, forced to take reverse mortgage. Learned wealthy ≠ liquid, asset wealth without liquidity = vulnerability. Liquidity planning: calculate liquid assets, determine target based on employment (3-12 months expenses), identify illiquid assets, improve ratio by building emergency fund, maintain balance between wealth building and liquidity needs.