Basic Liquidity Ratio
Basic liquidity ratio is a personal finance ratio that calculates the time (in months) for which a family can meet its expenses with its monetary assets.
Financial planners and advisers recommend having a minimum basic liquidity ratio of three months.
Monetary assets are liquid assets i.e. they are low-or-no risk cash equivalents which can be easily converted to cash with no-or-low loss in value.
|Basic Liquidity Ratio =||Monetary Assets|
Wellenbergs have monthly expenses of $8,200. They currently have $15,000 in savings account, $6,000 in a checking account, $25,000 invested in stocks and $20,000 invested in bonds out of which $5,000 are maturing in one day. Calculate their basic liquidity ratio.
Checking and savings deposits and bonds which are convertible to cash in 1 day are all monetary assets. Stocks and bonds which are not maturing in very short time are not monetary assets because they cannot be readily converted to cash and they carry significant market risk.
Monetary assets = $15,000 + $6,000 + $5,000 = $26,000
Basic liquidity ratio =$26,000 ÷ $8,200 = 3.17
Wellenbergs have enough liquid assets to cover their expenses for three and half months, a little over the minimum recommended by personal finance experts.
Written by Obaidullah Jan, ACA, CFA