Why is liquidity important in financial planning?

Liquidity is a crucial aspect of financial planning because it refers to the ease with which assets can be converted into cash without significant loss of value. Having liquid assets means that individuals or organizations can quickly access funds to meet unforeseen emergencies, such as medical expenses, job loss, or urgent financial needs. This accessibility ensures financial stability and prevents the need to sell other investments at a potentially unfavorable time.

In the context of financial planning, prioritizing liquidity allows for better risk management. While investing in high-return assets can be beneficial for long-term growth, the lack of liquidity could result in challenges during unexpected situations. Therefore, having a balanced portfolio that includes liquid assets is essential to ensure that immediate financial obligations can be met without unnecessary stress or additional costs.