Cash and Current Ratios

Two related measures gauge your ability to meet short-term obligations, and the distinction between them matters more for a household than it does for a company.

The current ratio is the corporate standard — everything you could convert to cash within a year, over everything you owe within a year:

The cash ratio is the stricter version, and the one that actually tells you whether you can sleep at night:

Use the cash ratio. For a corporation, “current assets” sensibly includes receivables and inventory, because collecting and selling them is what the business does every day. Your household has no receivables and no inventory — what it has is a brokerage account you would have to liquidate at whatever price the market offers on the day you need the money, which is precisely the day markets tend not to cooperate. Counting a taxable equity portfolio as a current asset is how people discover, in the middle of a crash, that their liquidity plan required selling at the bottom.

Keep the cash ratio at or above 1.00 against the next twelve months of obligations. Below 1.00 is the real warning: it means covering this month’s bills would force you to sell long-term assets or borrow.

Debt itself is not the enemy — a mortgage or a margin line, used deliberately, is leverage, and the rest of this book treats it as a tool. The debt to avoid is the kind taken on to fund consumption you could not otherwise afford: that is simply spending tomorrow’s income today, and it has a habit of compounding against you.