One Dollar Saved Is Another Dollar Gained

Liquidity means your ability to convert an asset into cash easily without significant loss of value. The faster an asset is convertible into cash the more liquid it is. The ratio shows your ability to meet monthly expenses.

The higher the ratio , the more liquid your assets are. This ratio should be three to six months for you to have adequate liquidity. This means you are able to cover three to six months of expenses in case your income stops for whatever reasons. Some people will be more comfortable with up to 12 months but too much will not be good as the bank’s interest rates are less than 1% p.a. That is below Singapore’s average inflation rate of 3%. Your money is losing it’s purchasing power if you leave all of it in the banks.

Basic Liquidity Ratio = Cash in the Bank divided by Your Monthly Expenses