Monday October 22, 2012
You must not be addictive to having too much liquidity
Financial snacks - By Joyce Chuah
JOYCE CHUAH admits that she used to be one - an addict to having too much liquidity. But she writes that we need to stop being one.
Just look at our savings and fixed deposit (FD) accounts. The heaps of money we keep in such low return vehicles far exceed our need for emergency funds. And yet, we do not complain about the returns, simply because they provide us with yet another addiction: “guarantee”.
Sure, FDs and savings accounts are important. One, they provide us with the convenience to access them to pay for our living expenses and two, they are usually good places to stack up some money as cushion against emergency needs - usually three to six months if you are single or nine to 12 months if you have dependents. Apart from this, keeping too much cash in FD and savings confirms you as a liquidity addict'.
Most of the time, our argument is that FD and savings accounts provide us with a “guarantee of capital” and so, that's safe.
As Nobel-prize winning economist Milton Friedman would have said, “There is no such thing as a free lunch.” It just means that nothing is guaranteed, and if something seems to be guaranteed, it's just that we may be losing' through another means. In the case of a liquidity addict', that would be a word we have been taking for granted inflation.
The other addiction is “guaranteed income”.
We love fixed income generators despite the loss of purchasing power such instruments give us; despite the fact that we are years ahead of retirement and we do not need this income to fund our current living expenses.
If we are not in retirement age, what we really need is growth, not income. Even retirees still need to grow their money, albeit lesser in quantum.
It is hard to get out of this addiction. But we need to for the sake of the security of our purchasing power.
We need to stop being liquidity addicts.