Lesson 2. _____________________________________________________________

Date: 2015-10-07; view: 458.

Washington Mutual was forced into bankruptcy because a "run on the bank" – amounting to 9% of its deposits – occurring over a 10-day period in September, 2008. The credit markets were virtually frozen at that time following the bankruptcy of Lehman Brothers, and the near-collapse of AIG, Fannie Mae and Freddie Mac. The mass and speed of deposit outflows from Washington Mutual Bank shortened the time available for them to find new capital, improve liquidity or find an equity partner.

The lesson from the WaMu debacle is that often cash is a drag in a bull market, but cash is king when times are tough. Therefore, it makes sense to have adequate liquidity at all times, in order to meet contingencies and unexpected expenses – for example, an unexpected job loss or a medical emergency.

According to a September, 2009 survey by the American Payroll Association, 71% of Americans were living from paycheck to paycheck. Just over 28,000 of the nearly 40,000 respondents in the online survey said that they would find it somewhat difficult or very difficult to pay their bills if their paycheck was delayed by a week. A similar survey of 3,000 Canadians revealed that 59% would have trouble making ends meet if their paycheck was delayed by a week.

Given this reality, it would seem like a difficult task for most households to stash away enough cash to meet expenses for three months, as most financial planners recommend. But this does not preclude exploring other alternatives to build up a liquidity cushion, such as opening up a standby line of credit at your local financial institution or drawing up a plan to sell assets if required. (One way to start on the road to better finances is to examine your current budget; check out How Do Your Finances Stack Up? to learn more.)