What is a liquidity ratio in a personal balance sheet and how is it calculated?

Liquidity refers to how easy it is to convert an asset to cash. Cash equivalent assets such as money market funds, bank savings, and checking accounts have a high level of liquidity.

A liquidity ratio indicates the number of months that an individual or family could continue to meet household expenses by tapping cash assets (e.g., if they lost a job or were disabled). It is calculated by dividing cash assets by monthly expenses.

For example, if a family has $6,000 in cash assets and monthly expenses of $2,000, their liquidity ratio is 3.0. The higher the number, the better the ratio because it means that more months of expenses can be paid from a cash reserve.

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