If asked to state an individuals liquidity requirements/ constraints and if salary > expenses (savings) shd v make a note of the expenses and salary inflows or not since it is not a liquidity requirement because of the savings
Short and sweet: Bob spends $50K a year and his net income is $80K a year, so he has no liquidity needs and is actually saving money.
The liquidity constraint is cash outflow less cash inflow.
I hate the fact that we’re studying so hard so we can answer questions like this.
CEO: totally agree
Should we state cash inflow in liquidity constraint?
Liquidity requirements are the additional cash inflows (after salary) which we will need from investment portfolio. If there are saving then we don’t need to mention it in liquidity constraints.
If there are outflows such as funding education for children then you need to bring it up too.
Thanks for the replies guys just as a follow up under liquidity constraints would you state inflow from inheritance?
Also bit of a silly question but is there a subtle difference between constraints and requirements eg (savings not noted under requirements but noted under constraints or are they both the same
Would net savings be counted against liquidity requirement?
John saves $30k after tax after paying expenses.
He intends to buy a car for $50k. His liquidity requirement is $20k or $50k?
Based on mocks I’ve seen, it depends on what the text says. If they immediately add the $30k to the investment portfolio (and that is stated), then his liquidity requirement is $50k.