Many people are unsure about the right questions to ask to ensure a financial solution is a good fit for them. One important aspect often overlooked in financial conversations is liquidity.

Imagine using water as an analogy: if you’re thirsty, you can easily pour water from the tap or a filtered jug. If all you have is ice, you’ll need to heat it or patiently wait for it to melt. And if you ever tried licking ice as a kid, you know a shorter-term solution might be painful. We often take our water for granted (access to water is a whole other topic for another day), but the concept of liquidity is just as important for your cash.

When it comes to liquidity, a good question to ask is, ‘How quickly will you need your money?’.

Do you want to pick up a jug and pour water? Think of cash in your checking account, savings, or wallet. Or can you wait a few months, a year, or even longer?  Relying on home equity is like a frozen block needing a hammer, it can take a few steps and some time. This is why I prefer to see a solid cash cushion in place before someone starts paying down their mortgage.

Less liquid investments aren’t inherently bad; they all serve a purpose. It’s about understanding the implications ahead of time and whether that purpose aligns with your needs.

Before investing cash that you might need, consider asking:

• If I need my money, how quickly can I access it? Days, weeks, months, years?
• Is there a penalty for withdrawing my cash? If so, how much? Does that penalty change over time?
• If I can’t quickly access my cash, when will it be available? What is the expected timeline? Is access to the cash guaranteed?

Once you have answers to these questions, you will be better able to decide if the investment, with its expected returns and benefits, suits your needs.

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