When to incorporate savings into liquidity constraints - 2014 Mock

Why do we not incorporate annual savings into liquidity requirements? Specifically i’m looking at #1 in the 2014 CFA morning exam. I would think that the liquidity requirement would be reduced by the amount the couple is saving that year, but this isn’t the case. Are savings only incorporated into the return requirement? Thanks!

Anyone have any thoughts on this? I have the same question. I remember an endowment question where the $2m yearly contribution given lowered the liquidity requirement… isn’t it a similar concept?

thanks

I think S2000Magician would be the best person to advise here.

because liquidity requirements are when you have to liquidate a position in your portfolio in order to pay for an upcoming expense.

if you are drawing from your salary only for expenses, there is no liquidity requirement. if you have a shortfall between your salary and expenses, the different will need to be made up by your return, and that is a liquidity requirement.

if you are saving from your salary, it is actually like negative liquidity in a way

in the case of 2014 mock, i think the key there is that the savings is transferred directly into their investment account.

if this were not the case, i think the liquidity requirement would be 60k +25k -35k = 50k

but curriculum also mentions that anything that goes into the account should also be mentioned as liquidity.

Shouldn’t that be mentioned?

Who knows. It is always included for institutional IPS measures, but on the individual side I there specifically remember one instance where it was included (I think the above mentioned 2014 mock) and another where it was not included.

I have also noticed that on most, but not all, of the CFAI model answers when they ask you to formulate liquidity constraint, that they provide some specific numbers. Any thought as to if this is just them adding too much detail, or if you will get dinged 1 point out of 3 for not including??

This is it. The bolded text is CFA’s way of saying that it can’t be used to decrease the liquidity requirement. I hate that CFA institute does this, but that’s the kind of odd phrasing to look for and attempt to interpret.

The other question people are mentioning with the 2MM/year contribution doesn’t contain this language. I got that particular element wrong, actually, since I assumed like the above question that the 2MM was invested immediately. Since they don’t state that, however, I think the lesson we should take away is that it CAN be used to reduce liquidity. In this particular question, too, the cash contribution was coming in on the same day that the previous year’s spending value was calculated and, presumably, sent out - so it netted out.

Yep good call… that will be the reason thanks