1. Know where ALL your money comes from
Do you have access to enough cash? Answering this requires knowing all of your sources of income. A monthly salary or pension likely provides your regular income stream, yet you probably have others such as dividends, bond interest, capital gains, rental properties, employee participation plans, stock options or fixed-term deposits. Put together an exhaustive list of all your income streams.

2. Understand the liquidity of each asset
The next step is to categorise the liquidity of each income stream, which we will refer to as assets. For each asset, assess the process, ease and cost of liquidating it. Can it be liquidated directly online 24/7 or is co-signatory at the bank required? Check which assets can be used as collateral to efficiently and cost-effectively borrow liquidity, and know the steps to make this happen.

3. Be aware of your spending needs
It’s time to consider your spending needs. It helps to think long-term and account for education, renovations or travel. This is where a liquidity plan comes in: Liquidity planning visualises income and spending streams over a period of time, allowing you to identify surplus liquidity for saving or investment purposes or income gaps requiring coverage from liquidity reserves.

4. Define your essential liquidity requirements
It helps to think of liquidity as having three categories: essential liquidity, precautionary liquidity and discretionary liquidity. You’ve probably got a good overview of your essential liquidity needs: those which cover your basic living expenses, including rent or mortgage payments, insurances, food, transport and clothing. You need immediate access to this cash at negligible cost.

5. Create a precautionary liquidity plan
Unexpected events and situations do occur. Planning for precautionary liquidity is a necessity, as this is the cash that will help you in case of an unexpected job loss, medical bills or even the death of a loved-one. It’s worth talking to an expert to determine how much funding you’ll need to have on hand. Assets should be easily reachable at minimal cost.

6. Know how to access discretionary liquidity 
In addition to being a risk management tool, effective liquidity planning should enable you to take advantage of great opportunities, such as real estate or financial investments. This is the role of discretionary liquidity. Smooth and timely access to these assets means you may be able to seize opportunities you just don’t want to miss.

7. Plan accurately
Accurate planning minimises the risk of having to liquidate assets at unfavourable market conditions or with a high cost penalty. Consider longer-term financial goals or projects with liquidity needs, including renovations or the gifting of money to children. Detailed planning helps identify incoming liquidity events, such as incoming pension assets, company equity plans, insurance policies and inheritances.

8. Balance your asset allocation and risk profile
You’ve now put together a wealth overview and assessed your liquidity needs. The next step is to find the right approach to asset allocation, with the optimal situation being to manage your assets so that they generate additional income. If you’ve done your liquidity planning well, you’re better positioned to determine your risk appetite and know the amount and type of risk you can afford to take. Ensuring your asset allocation and risk profile are in balance is a key step towards financial stability.

9. It’s time for a reality-check
Why is liquidity planning crucial? With many people facing economic uncertainty and financial pressure, it’s smart to re-assess the security and stability of your income streams. Review spending if your income has changed: Are all direct debits, standing orders and regular monthly outgoings still essential? And, with many European companies reducing or cancelling dividend payments, will this jeopardise any assets you rely on? It’s a timely reminder to diversify your portfolio by geography as well as asset class. For those that may need extra funds, consider if temporary financing sources such as Lombard lending or liquid assets are suitable.

10. Keep calm and carry on planning
Effective liquidity planning can stop unexpected and challenging situations from being emotionally overwhelming. Planning for both best- and worst-case scenarios helps to ensure that when times get tough at least your finances can remain as calm and stable as possible.

 

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