Key takeaways
A liquid asset is something you can quickly convert into cash without losing much of its value.
Common examples of liquid assets include cash, checking and savings balances, stocks, bonds, and money market funds.
Non-liquid assets, like real estate, take longer to sell.
Keeping some liquid assets on hand helps you handle emergencies and reach your short-term goals.
Having ready access to cash is a big part of your financial health. Liquid assets – assets you can quickly and easily exchange for cash – give you the flexibility to pay off debt, cover costs in a crisis, or invest in new opportunities.
Here's a simple guide to all things liquid assets.
What is liquidity?
Liquidity refers to the ease with which an asset (anything you own that has monetary value) can be converted into cash. The easier it is to exchange an asset for cash, the more liquid it is. By that definition, cash is considered the most liquid asset.
You can usually convert a liquid asset to cash without losing much of its market value. Liquid assets are often viewed like cash and are sometimes referred to as cash equivalents because you can typically easily exchange them for cash at any time. To be considered liquid, assets must be traded on a trusted market with a large number of buyers and sellers. It must also be easy and secure to transfer ownership of a liquid asset. Marketable securities such as stocks, bonds, and mutual funds all fit the bill as they can generally be bought and sold for cash.
Owning liquid assets is important because they can help you cover basic living expenses and handle emergencies when they arise.
Liquid asset examples
Any type of asset can be considered liquid. In addition to physical cash, liquid assets generally fall into two categories: cash equivalents and financial accounts. Some of these are more liquid than others, depending on how quickly and easily they can be converted into cash.
Here's a quick look at the most common types of liquid assets held by both individuals and businesses:
Cash on hand
Money in a checking account
Money in a savings account
Money market assets
Stocks
Bonds
U.S. Treasuries
Mutual funds
Trust funds
Exchange-traded funds (ETFs)
Accounts receivable
Tax refunds
Court settlements
Certificates of deposit (CDs)
Retirement accounts
Liquid investments (cash equivalents)
Liquid investments, also referred to as cash equivalents, are investments that can be liquidated in a fairly short period of time (generally 90 days or less). Here are some examples of liquid investments:
Stocks: The stock market has a steady number of buyers and sellers, which means stocks can easily be converted to cash. The speed at which cash is converted varies by security type, but you can typically sell your shares and use the funds within a few days.
U.S. Treasury bills (T-bills) and Treasury bonds (T-bonds): These are investments backed by the U.S. government. They can generally be sold instantly for cash on the secondary market if you need their value before they mature.
Exchange-traded funds (ETFs): ETFs are investment funds that are traded like stocks on the open market, making them fairly easy to sell quickly. You generally receive cash within a few days of trading, but you may have to sell ETFs at a loss if you need your money quickly.
Mutual funds: Rather than purchase individual stocks, investors can buy a portfolio of investments through mutual funds. Mutual funds are considered liquid since investors can usually sell their shares at any time and generally receive their money within the next business day.
Money market funds: These are types of mutual funds that invest in low-risk, low-yield investments. You can typically cash your money market funds in at any time, making them a liquid investment.
Liquid financial accounts
The financial accounts where you hold your assets can also offer liquidity. Money in these accounts is generally considered liquid because you can withdraw it easily and get cash when you need it. Here are some examples of liquid accounts:
Checking account(s): Easy access to cash in your checking account makes it highly liquid. In addition to withdrawing cash, you can often also pay for things directly with a debit card or by writing a check.
Savings account(s): Savings accounts also provide easy access to your cash but are designed to be slightly less liquid than a checking account. There are usually more withdrawal limits imposed on savings accounts.
Certificates of deposit (CDs): A CD is a type of savings account that allows you to deposit funds for a set period. If you withdraw funds from a CD before it matures, you may pay a small penalty. But you can typically still quickly withdraw the money if you really need it.
Money market accounts (MMAs): MMAs are a type of low-risk, interest-bearing savings account. They offer some flexibility, so you can generally access funds when you need them, but they also may be subject to transaction limits set by your financial institution.
Retirement accounts: These accounts, such as a 401(k) or an individual retirement account (IRA), are generally considered liquid once the owner reaches retirement age. But there are penalties for their use before then.
Why are liquid assets important?
Liquid assets give you flexibility. When an unexpected bill or financial emergency arises, you can generally cover it with cash on hand instead of taking on debt.
Liquid assets also help you handle short-term needs. You can pay upcoming bills, manage a gap in your income, or jump on an investment opportunity more easily.
But there's a tradeoff to keep in mind. Highly liquid assets tend to grow more slowly than long-term investments, so a mix of liquid and non-liquid assets often works best.
What is liquid net worth?
When it comes to tracking and calculating your net worth – your assets minus your liabilities – your liquid assets will come into play. Your liquid assets help contribute to your overall net worth.
To calculate your net worth, simply add up all your assets – both liquid and non-liquid – and subtract your liabilities (any debts you owe). Knowing the total value of your liquid assets tells you how much quick cash you'd have access to if you needed it quickly.
Holding some of your net worth as liquid assets is a smart move. But it's also a good idea to diversify your assets and include some non-liquid ones.
Did You Know?
Many financial experts recommend maintaining 3 to 6 months of expenses in liquid assets in an emergency fund, should you experience an unexpected financial hardship. An account with automatic savings features can help you set aside a portion of your pay to grow your emergency fund.
Liquid assets vs. non-liquid assets
Not every asset you own is liquid – some are non-liquid, also called illiquid assets. In general, non-liquid assets can't be quickly converted to cash without losing value. While you can sell non-liquid assets, they may depreciate if sold too soon.
Some common examples of non-liquid assets include:
Land and real estate
Automobiles
Art
Jewelry
Collectibles
Antiques
Musical instruments
Private equity
Stock options
These types of assets can take months or even years to sell because you'll often have to find someone to transfer ownership to and come to an agreement on an offer. Take real estate investments, for example – arguably one of the most challenging assets to liquidate. Selling a property often takes time, and accepting the first offer you receive might result in a significant financial loss.
As a general rule, the more liquid an asset is, the less its value tends to increase over time. Although a real estate property is highly illiquid, it typically increases in value over time, helping you build long-term wealth. A fully liquid asset, like cash, may be eroded by inflation. To save for your long-term financial goals, you should aim to keep both liquid and non-liquid assets.
Building your liquid net worth
Liquid assets let you get cash quickly when you need it most. They can also matter when you apply for loans, calculate your net worth, or run a business.
Creating a budget and opening a high-yield savings account are two ways you can start building your liquid net worth.