It does not matter if you are a businessman operating a chain of stores or a simple homemaker – liquidity is very important for financial wellness. Too many Singaporeans focus too much on their assets and ignore this fact. You can avoid the pitfalls by taking out a private personal loan in Singapore.
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What is liquidity?
Liquidity is a measure of how much cash you have access to, as well as assets that can be quickly converted into cash without losing value. The term ‘liquidity’ itself is a reference to how liquids flow easily from one place to another.
The advantage of liquidity is that it lets you pay for the goods and services you need immediately. So, any cash in hand, your savings and current account balances, stocks and bonds, and any fixed deposit accounts all count towards your liquidity.
Major assets such as your home and office together with everything they contain, vehicles, and immovable assets do not count towards liquidity. This is because if you were short of cash and had to sell them today, you would get less than their maximum value.
For an individual, liquidity means being able to pay their bills and buy essentials like food without going into debt. For business owners, liquidity gives them the ability to purchase stock to generate sales (and profits), pay employees, and generally keep the business going.
In either case, a liquidity shortage can lead to serious issues. Businesses found that out the hard way when the Covid pandemic hit, and many of them had to close. For families, liquidity is essential for emergencies like medical problems, car breakdowns, and other large bills.
You may be surprised to know that a private personal loan in Singapore may be the best way to fight a liquidity shortage.
Managing your liquidity
You should not avoid liquidity if you are financially comfortable at the moment. In fact, calm times are perfect for increasing your liquidity.
Financial advisers say that you should have between three and nine months’ worth of expenses in hand at any time. Obviously, the exact figure depends on your particular needs and responsibilities. It is always a good idea to spread the amount over several accounts.
A personal loan can help you to maintain this liquidity.
The first step to getting the right private personal loan in Singapore is to find a lender that gives you the lowest personal loan rate in Singapore. That way, you maintain your liquidity because your income can cover the small repayments. You get a large amount of cash on hand straight away but only pay it back over time.
Getting a personal loan from a legal money lender in Singapore is less formal than getting a bank loan. You can even negotiate the interest rate and the repayment time. In this way, you can choose a loan contract that fits with your finances and liquidity needs.
Is it the right decision?
One school of thought opposes using a personal loan to improve financial liquidity. They use the basic formula of:
Liquidity Ratio = Cash ÷ Total Liabilities
Because a loan will fall under ‘Liabilities’, it will reduce the liquidity ratio in this equation. However, this is a simplistic view that does not reflect the reality of the situation.
The correct way of looking at this is to recognise that a loan will increase the ‘Cash’ value, too. That increases the ratio by a significant amount compared to the monthly repayment due (Liabilities). Of course, you will need to find the lowest personal loan rate in Singapore to really benefit from this.
No matter what the situation, a good plan always helps. Don’t wait for a crisis or major economic downturn to hit before you start building up your liquidity. Here are three effective financial strategies that experts recommend:
- Start small – Start a small liquidity fund by saving the bare minimum. As the fund grows and you realise that it is easy to save, keep making small increments to how much you contribute every week or month.
- Automatic contributions – Have your bank automatically deduct a fixed amount from your salary account and add it to a fixed deposit or other high interest account.
- Tax refunds – Don’t see tax refunds as a ‘gift’ but as an opportunity to increase liquidity. Save it and invest it.
These simple measures will go a long way in helping you build a strong and stable financial foundation for tomorrow.