Equity is everyone’s priority to become rich. But one should never build equity at the cost of the liquidity. If we keep doing this, we might end up at bankruptcy. The liquid assets should be properly managed. The liquidity risk should be handled carefully. The risk should be mitigated even if the debt has to be reduced slowly. Owning a property specifically a home is a dream for almost everyone around. In doing so, it the emergency fund should be maintained continuously. In case of an altered financial condition, the existence of no property can help but only the cash in hand it let you survive through the time. Any family emergency at such a time can create a panic in life.
Importance of liquidity
Liquidity is imperative for emergency situation. In case payments are missed the liquid assets can be readily sold and cash is gained from them. In case of too much liquidity, one may indulge in other deals and enhance the sphere of their business. The business should be scrutinized, all its costs and expenses and enough reserves should be there to avoid any risky situation. Cash is required for financing and credit no matter if the business is small or big. If equity is gained on the expense of liquidity, a slightly problematic situation can turn into a financial hazard for the company or the individual buyer. It is better not to mess with the liquidity to achieve equity.
More equity may lead to foreclosure
We all want to each equity and pay the last voucher happily. But what if there is a mishap before we have paid a significant amount. If a payment is missed the bank will put the house on auction to recover their pending payment and the home buyer will lose all that money they could have recovered if the property was listed. The bank also wants to avoid hitting the profit margins.
How to get away from such a situation
The greatest defence against foreclosure from the bank is liquidity. The bank is only concerned with their payments. They will never know if there is a problem unless a payment is missed. The home buyer should keep this in mind. If enough reserves are there and the payments are made there is no issue. If the situation gets worse and cannot be solved one can easily put the house in the market and try to get rid of the financial crisis heading their way. One of the issues in maintaining the liquidity is that if the cash in the reserves is spent while maintaining the debt. In such a case, the buyer is losing the reserves and not reaching the equity as well. To avoid this situation, the best way is to discipline yourself. Reserves should be spent with due knowledge of future payments to the bank as well as the expenses that has to be paid from the reserves and cannot be paid from the regular income. There is one more dangerous situation created by the buyers that is to invest the reserves in a risky asset.
The investor has fair chances of losing the reserves in the risky investment. Investing in a low risk asset is comparatively less risky for maintaining the liquidity. In case of any issue with the payment, there is a time span given by the bank to clear the periodic payment in some terms and conditions. The liquid asset should be such that it can be sold in the given time and the payment is made timely so that the does not gets involved in recovering the payment.