Why Liquidity Is Important in Uncertain Economic Times
Posted May 30, 2020
As a result of the COVID-19 pandemic, the U.S. economy has fallen into a deep recession. With businesses shut down and customers staying home, millions of Americans have been furloughed or lost their jobs—pushing the unemployment rate to its highest level since the Great Depression.
In challenging economic times like these, it’s important to be financially prepared for whatever the future might hold. Experts recommend paying down debt or increasing savings as ways to help provide a safety net should you lose all or a portion of your income at any point.
You’ll also often hear people talk about ensuring you have more “liquid assets” when the economy is on shaky ground. But what exactly does that mean? When most of us hear the word “liquid” we tend to think about something that comes out of our faucet not something that goes into our bank account.
To shed a little light on the topic, we thought we’d take the opportunity today to provide more clarity on what liquidity is, why it matters during a downturn, and how it connects to your mineral rights and royalties.
What Are “Liquid Assets”?
Essentially, liquid assets are any items of value that can be turned into cash quickly when you need them to without losing their market value. You also may hear the term “liquidity” used. That just means the availability of assets that can be turned into cash—so if you have “good liquidity”, you have a good amount of assets that can be converted to cash.
Examples of liquid assets include:
- Cash itself
- Checking/Savings Accounts
- Major Stocks/Mutual Funds/Bonds
These are all things you could easily turn into money in your hand in a short amount of time without taking a market loss in the process.
Examples of assets that are not very liquid include:
These are all assets that you can’t typically convert into cash in a short amount of time without taking a loss on your initial investment.
Why It’s Important to Be More Liquid During Times of Economic Volatility
The reason many people want more liquidity during a downturn is because liquid assets provide you with greater flexibility. Quick access to cash gives you the flexibility to pay bills and debt even if there’s a disruption in your income stream.
Thinking you can sell your car or house if you get into financial trouble isn’t always a practical strategy for a couple of reasons: (1) It can take a long time to sell those items and you may need money in the meantime; and (2) in a recession, the value of your home or car may go down if there aren’t people around with the money or desire to buy.
Key benefits of having liquid assets:
- Pay off debt like loans or a mortgage if you should incur an income loss so you wouldn’t lose your home or car
- Not have to sell property or assets and take a loss on them because you are in a time of need
- Not get yourself deeper into debt
Are Minerals Considered a Liquid Asset?
You may be wondering if your minerals are considered “liquid”. Unfortunately, your minerals aren’t the type of asset you can tap into when you need money fast. Your minerals are under the ground, which means you can’t just go grab them and turn them into cash at any time.
If you own your mineral rights or have leased them and are receiving royalties, that’s certainly a valuable asset. But like your home or your “surface property” (the property you own above the ground), you can’t just turn around and sell it in a day or two. That’s why, if you’re considering selling your mineral rights or royalties to be more liquid, it’s good to think ahead.
Selling your mineral rights or royalties (all or a portion of them) means you can convert that asset into cash to add to your financial security. You’re taking an asset that you own, monetizing it, and getting something liquid for it. That way, you’re in control of that cash and you have more flexibility in the current environment.
How Your Minerals Can Help You Increase Your Liquidity
In times of uncertainty or volatility like we’re in right now, liquidity (access to cash) is key because there are so many unknowns. We don’t know when the economy is going to recover. We don’t know if COVID is going to surge again or when the next pandemic is going to happen. We don’t know how the next oil war like the recent one between the Saudis and Russia will affect domestic oil values and if it will decrease the value of mineral rights or royalties.
We’ve talked to several landowners recently who are considering selling their mineral rights because they’ve lost their jobs. You always hate to hear that. But these landowners do have an asset that can potentially help provide for them and keep them from having to sell their homes and property. For others facing similar situations, your minerals can be a real difference maker.
There are so many unknowns that you can’t control during these difficult economic times. But you can always control the assets you own and the cash that can be derived from them. Mineral rights and royalties owners have a great opportunity for liquidity that can give you more options for navigating the road ahead.
Are you an Ohio landowner interested in learning more about how you can increase your liquidity by selling your mineral rights or royalties? Talk to the experts at Gateway Royalty today. We’ll help you assess your situation and evaluate your options.