The 5 Needs of Money™ — Liquidity
Liquidity is a unique need, because it’s not about the future — it’s about now.
Why you may need liquid assets:
1) Emergency Funds
2) Payoff Bills
3) Travel / Leisure
4) Be able to help family and friends
5) Be able to invest in something at a later date
Often times people overestimate their need for liquidity, especially with qualified money. Qualified money (IRA, 401(k), 403(b), Deferred Comp, DROP, Etc.) is 100% taxable in the year that you take a distribution, and because of that most people do not want to take large distributions because it may mean they will end up in a higher tax bracket.
If you have a large amount of money liquid in a non-qualified account, like a money market or savings account, then there’s typically no issue with distributions from a tax perspective. One thing to take into consideration about money markets and savings accounts: because of low interest rates, money in those accounts are actually losing purchasing power each year because they’re not keeping up with inflation. In other words, if you’re making 0.3% and inflation is 3.0%, the purchasing power (what your money can actually buy) is decreasing by 2.7% per year.
So like everything else, make sure your liquidity is balanced. You want to have enough liquid that you can spend your money how and when you’d like, but not so much liquidity that your money is severely devalued by inflation over a long period of time.