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Risk and Liquidity

Whenever you look at risk, you should simultaneously be looking at liquidity. You can understand your risk exposure best by initially analyzing your liquidity. Do you have enough cash that is accessible to pay your mortgage, and pay all other bills? For how long? How about enough to allow you to ride out a downturn in the market, economy or job loss?

Be sure that you start with a sound foundation when building wealth. That starts with liquidity and managing risk. It is like the song I used to sing in Sunday School about the wise man versus the foolish man.

1. The wise man built his house upon the rock, The wise man built his house upon the rock, The wise man built his house upon the rock, And the rains came tumbling down.

2. The rains came down, and the floods came up, The rains came down, and the floods came up, The rains came down, and the floods came up, And the house on the rock stood still.

3. The foolish man built his house upon the sand, The foolish man built his house upon the sand, The foolish man built his house upon the sand, And the rains came tumbling down.

4. The rains came down, and the floods came up, The rains came down, and the floods came up, The rains came down, and the floods came up, And the house on the sand washed away.

Understanding, managing and reducing RISK is paramount in building wealth.

We talk a lot about optimizing assets, and understanding, managing and reducing RISK is paramount in this process. You cannot achieve financial independence until you understand the risk exposure you have on all your assets. Once you understand all the different types of risk with your home, real estate, IRAs, 401(k)s, retirement accounts, insurance, etc.; you can then begin to learn how to manage and reduce your risk exposure.

I did not say eliminate risk. There is no way you can completely remove all risk. Even if you were able to, there would be no return nor any reward. You would remain stationary with no opportunity for growth. Risk is essential to building wealth, but it can also be its demise.

One way to manage and reduce risk is to share the risk with someone else or with another entity. That way you do not have full exposure and neither does the other party. But together you are stronger and can be empowered to do much more. The most common example of this is a mortgage on your home. But it also can be applied to your retirement accounts, life insurance, and other long term investments.