Part 1 of 2-Part Series
The next ratio in the list of important financial metrics we use is what is known as the liquidity ratio. Like the equity ratio, the liquidity ratio (LR) is more often found in business when determining their financial positions. What it measures is the companies’ ability to pay off its debts without raising outside money, or paying off its debt with only its own capital. What the LR actually determines is the ability of the company to take care of their liabilities in the short term, with the higher the number indicating a better liquidity position.
You may be wondering why we use these traditionally business metrics when your wealth management is on a personal level. It’s a good question, and it relates to our approach and structure to be your financial managers. Traditionally, personal wealth management doesn’t include your entire life picture, but rather your investments in order to grow your money. That is one of the most aspects to wealth management, but there is much more to consider because there is much more in your life. Assets such as real estate and goals including social and philanthropic views are vital in the picture of your wealth.
The reason we take a business minded approach is because business financial management must take every little aspect into consideration, and by applying this to your personal wealth, we’re able to manage at a higher level. Of course, we’ve tweaked the LR in order to be applicable to your personal wealth management and as such is determined by the following formula:
This tweaked formula now measures how long you will be able to maintain your current lifestyle with only your liquid assets. This means your cash, or assets which can be easily liquidated into cash, and does not include retirement savings. You may be wondering why this would be important to know, but imagine you weren’t able to work for any reason ranging from being laid off to taking time off to care for a family member. By know your liquidity ratio, we can manage your liquidity in case it was ever needed.
Part 2 continued next week.