Owning liquid assets can help you cover day-to-day expenses, as well as better prepare you for emergency situations. Learn what liquidity is and why it's important to have both liquid and non-liquid assets.
Having ready access to cash is a huge component of one's financial health. Cash and cash equivalents offer a level of financial flexibility that's important for both individuals and businesses. So liquid assets — an asset that can quickly and easily be exchanged for cash — are particularly important. Owning liquid assets can help you pay off debt, cover costs in a crisis, or allow you to 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. So by that definition, cash is considered the most liquid asset.
A liquid asset can quickly be converted into cash without losing much of its market value. Liquid assets are often viewed like cash and are sometimes referred to as cash equivalents because they can easily be exchanged for cash at any time. Quick cash conversion is the main factor that contributes to an asset's liquidity, but for an asset to truly be considered liquid, it must be traded on a trusted market with a large number of buyers and sellers. It must also be relatively easy and secure to transfer ownership. Marketable securities such as stocks, bonds, and mutual funds all fit the bill since they can be bought and sold for cash readily.
Owning liquid assets is important because they allow you to pay for basic living expenses and handle emergencies when they arise.
Liquid Asset Examples
All types of assets can be considered liquid. In addition to physical cash, liquid assets will generally fall into one of two categories: cash equivalents or 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 (some of these will be expanded upon in more detail further below):
Cash on hand
Money in a checking account
Money in a savings account
Money market assets
Stocks
Bonds
U.S. Treasurys
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).
Some examples of liquid investments include:
Stocks: The stock market has a steady number of buyers and sellers, which means stocks can easily be converted to cash. How quickly a cash conversion takes place will vary 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): T-bills and T-bonds are investments backed by the U.S. government. They can instantly be sold 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 will generally receive cash within a few days after trading, but you may end up having to sell ETFs at a loss if you need your money quickly.
Mutual funds: Rather than purchase shares of an individual stock, mutual funds allow investors to buy a portfolio of investments. Mutual funds are considered liquid since investors can sell their shares at any time and generally receive their money within the next business day.
Money market funds: This is a type of mutual fund that invests in low-risk, low-yield investments. You can cash your money market funds in at any time, making them a liquid investment.
Liquid Financial Accounts
The financial accounts in which you hold your assets can also offer liquidity. Money in these accounts is considered liquid because it can be withdrawn easily to get cash when you need it.
Some examples of liquid accounts include:
Checking account(s): Easy access to cash in your checking account makes this type of bank account highly liquid. In addition to withdrawing cash, you can 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 a certain amount of funds for a set period of time. If you withdraw funds early from a CD before it matures, you may have to pay a small penalty. But, you can typically still quickly withdraw the money if you really need it.
Money market accounts: Not to be confused with money market funds, a money market account is a type of low-risk, interest-bearing savings account. Money market accounts offer some flexibility, so you can access funds when you need them, but they also are subject to federal transaction limits.
Retirement accounts: A retirement account can include a 401(k), an individual retirement account (IRA), and other accounts. These accounts are generally only considered liquid when the owner has reached retirement age, as there are penalties for their use before then.
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, liquid and non-liquid, and subtract your liabilities (debts you owe). If you want to know the total value of all your liquid assets, sum them up. This will tell you how much quick cash you'd have access to if you needed it in a hurry.
Holding some of your total net worth in the form of liquid assets is a smart move, but it's also a good idea to diversify your assets and have some that are non-liquid as well.
Liquid Assets vs. Non-Liquid Assets
Not every asset you own can be categorized as a liquid asset — some will be non-liquid assets, also called illiquid assets. In general, non-liquid assets can't be quickly converted to cash like liquid assets can be without losing value. While non-liquid assets can be sold, they can depreciate in value if sold too soon. Non-liquid assets are more long-term investments.
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 real estate property could take a long time, and accepting the earliest offer on a property might result in a significant financial loss for the seller.
As a general rule, the more liquid an asset is, the less its value will increase over time. So although a real estate property is highly illiquid, it will increase in purchasing power over time and can help you build long-term wealth. A completely liquid asset, like cash, may fall victim to inflation. To save for your long-term financial goals, you should aim to have liquid and non-liquid assets at your disposal.