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How Liquid Are You?

Updated on June 15, 2015

What Is Liquidity....

I am not talking about water, alcohol or any other known liquid but what I want to talk about is money liquidity. Yes, money liquidity. Some may look at liquidity as the ease of conversion of cash into other forms while others understand it as the the amount of cash one possess so that much cash-primarily notes and coins- means high liquidity while less cash implies less liquidity. Whatever way you take it, try to explore yourself to know how liquid you are. Are you the kind of person who does a lot of transactions in cash or you are that who may mostly pay using credit cards? OK then whichever type you are, I thought you should learn this concept about money and liquidity. Read on.


Money, Money, Money, Money...moneyyyy

It is a medium of exchange. Isn't it? No it is. Money comes in different forms and one can freely say they have money even without notes and coins at there disposal. Economists constructed this in what has all long been referred to as the supply and demand for money. For example, let's say money is the entire stock of currency in an economy. By so, we are referring to tangible and intangible aspects. While tangible refers to commonly held notes and coins, intangible are the monies in bank accounts and savings societies. Now, I want to carefully take you through the different types of money so you can personally give yourself an answer to the above question. How liquid are you?


Types of money.

The various types of money in the money supply are generally classified as "M" s such as M0(M-note), M1 and M2. This classification is based on the ease of conversion of that type of money into real cash-notes and coins-

Now, there is M0 which is the most liquid measure of money and mainly includes the notes and coins in the pocket of someone reading this article. M1 refers to the checking account deposits that we put in our personal accounts where we can easily withdraw it. For example that account which workers receive their salaries from.

M2 is the money in saving accounts as well as money market accounts. Most savings and money market accounts are not easy to access and withdraw cash stupidly hence this money is less liquid than M1.

M3 are the large deposits and other long term deposits that will deny you access for some long time making it even less liquid.

The explanations on types of money have been simplified as much as possible so that persons from other fields can easily fathom and probably get to know what to do on terms of holding less or a lot cash or no money at all.

Economists advise......

In my pocket you will rarely get more than 1000 shillings(approximately 12 dollars) unless I am on some small businesses but I will quickly get rid of it by depositing it somewhere. The point is that we are advised to hold less cash as possible if we are sure we don't need it. Still there are several motives to hold on cash but before that my group advises the following.

  • For anyone who goes shopping, they need not to carry notes but better fill their credit and swipe all the way.
  • When paying fees, carry not so much cash but instead do some paperwork or online transactions to see the money transferred to that specific school account.
  • Many do not drive, including someone one hubpages- Nick Osale- For public transport users, I still want to see and hear you swipe your cards in that train, cab or 'matatu' * matatu is Kenyan language to mean a public bus or minibus for transporting people.

why I don't want you holding so much money

Too much money is a unique problem for many tycoons and even companies. At any point you may start struggling with the problem of what to do with all that cash, a problem characteristic with drug dealing and "money laundry"

Cash creates problems because holding excess of it is as bad as holding excess debt. Money-sitting will create opportunity costs so I want you to typically use it to clear your debt, buy shares or to make asset acquisitions. Be careful that cash pouring in does so at a pace almost similar as it's going out.

Once again this 'too much cash' is just a unique challenge but not a problem that has not been rising too often. If you choose to hoard money by being too indecisive with it, you will in the end loose that 'hidden' benefit of having too much cash poses.

Am not stopping there...Too much cash is a source of some practical problems including for example higher borrowing costs. A significant con of holding much cash is that you may end up paying more interest on debt so it is necessary to settle the debt quickly before it accumulates to higher levels.

And finally-and very important- is that excess cash puts you in a position to make careless mistakes. Preserving whatever substantial amount of cash signifies that you have entered a comfort zone with your personal financial operations so that rather than seeking new financial development strategies, one ends up throwing and splashing money in whatever places with no justifiable reason. That is just a characteristic of lack of traditional due diligence.


Summarized Summary

I don't know or even want to know what you might have been doing but unless you are a drug dealer, dont carry so much cash. Use your cards if you have to pay or any cashless transaction that might come forth. So much said I thought its enough. So where do you rank yourself in as far as cash liquidity is concerned? Meditate so you can answer yourself. HOW LIQUID ARE YOU?


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