Liquid Assets: Definition, Examples And Facts
Sarah Li Cain5-minute read
March 22, 2022
There are lots of ways to be financially secure, such as increasing your income, budgeting well and investing for your retirement. However, some of the most important indicators of financial health are your liquid assets. These can help you when you’re in a bind and prevent you from resorting to loans or credit cards to help get you through.
We’ll cover what a liquid asset is, go over some examples and explain why they’re so important to your financial well-being.
What Are Liquid Assets?
A liquid asset is anything you own that can quickly and easily be converted into cash in case of emergency. Liquid assets are an important indicator of financial security. It is either cash you have on hand or an asset you can easily convert to cash. This can include money market accounts, certificates of deposits (CDs), taxable investment accounts or other types of securities you can transfer easily to your savings or checking account.
Since you can convert these types of assets relatively quickly, it's usually viewed as similar to cash. In many cases liquid assets are also referred to as cash equivalents because you can easily exchange them for cash whenever you want.
For an asset to be considered liquid, it needs to meet a certain set of criteria. Here are some benchmarks that fall under the liquid assets definition:
- Established market: This simply means that there are existing buyers and sellers for the asset. For example, you can purchase a certificate of deposit from a bank.
- Large number of interested buyers: There needs to be enough people who are willing to purchase or convert your asset to cash. Otherwise, it’ll be hard to receive cash quickly.
- Easy transfer of ownership: Doing so easily is another way for your assets to be converted quickly.
What Are Some Examples of Liquid Assets?
Luckily, there are plenty of types of liquid assets should you need to convert them to cash.
Here are a few liquid assets examples:
- Cash: Yes, it’s obvious, but cash can be used quickly and easily. This can be money from your Zelle account to physical bills you have in your wallet.
- Checking account: Cash sitting in this type of account can typically be withdrawn with minimal imitations.
- Savings account: Most financial institutions limit you to six withdrawals per month. However, there are many high-yield savings accounts offering competitive rates.
- Stocks: Ones held in your name in a taxable account can be sold quickly.
- Marketable securities: This type of asset can be purchased in a public stock or bond exchange and usually mature within a year.
- S. Treasuries: investors can purchase short-term securities that mature in as little as a few days up to a year. They’re sold at face value.
- Bonds: Same as stocks, ones held in your name can be sold and converted to cash.
- CDs: Banks and credit unions offer customers a higher exchange rate in return for keeping a lump sum of cash for an agreed amount of time. It can be anywhere from a few weeks to a few years. Generally you can withdraw this amount anytime, but you may have to pay a penalty.
- Mutual funds: As long as they’re held in a taxable account, they’re generally lumped into liquid assets.
- Money market accounts: This is a type of savings account you hold at a bank or credit union, typically at a higher interest rate than a checking account. Like a savings account, you may be limited to the number of allowed withdrawals per month.
Why Are Liquid Assets Important?
Liquid assets are important because if an emergency arises, you can convert them into cash to cover big expenses. When you’re facing a tough situation, you don’t necessarily have the time to do things like sell your house or valuables to come up with enough money.
When you’re familiar with your liquid assets, you’re able to figure out your liquid net worth (a key indicator of your financial position). The higher this number, the more money you have to draw from if you face hardships, like if you need to take time off from a serious illness, experience a job loss or even pay for major home repairs.
An Example Of How Liquid Assets Can Make Or Break You
For example, your spouse gets into a car accident and is unable to physically return to work. While she has a long-term disability policy, it won’t start paying out until 90 days later. Until then, you need to come up with a way to pay for all your monthly expenses like your mortgage payments and groceries – your income isn’t sufficient to do so.
Here’s where having enough liquid assets comes in handy: you can convert them to cash so you can use it to cover the loss of your spouse’s income for those 90 days. Selling your home for instance, will take much longer than that – what will you do in the meantime? Plus, other illiquid assets like retirement savings have regulations in place that include penalties for taking money out before you reach a certain age.
Should You Prioritize Liquid Assets Over Fixed Assets?
Acquiring liquid assets should be first on your list to ensure your stability and security. While it’s important to ensure you have enough for your golden years, it won’t do you any good if you aren’t able to handle expected events right now.
Once you have enough liquid assets built up, you can start saving for retirement and setting yourself up for the future.
How Can You Build Your Liquid Assets?
Don’t have a lot of liquid assets? In this case, start by setting up an emergency fund and pad it with at least 3 – 6 months’ worth of expenses (more if you have variable income). This money should be kept where you can access it easily such as high-yield savings or money market account so you can draw on it immediately.
From there, you can work on acquiring other types of liquid assets such as certificates of deposit, mutual funds and marketable securities. You can rely on these assets if your emergency fund runs out.
The Bottom Line On Liquid Assets
Liquid assets can be thought of as cash equivalent because they can be converted into cash quickly. They’re an important indicator of financial health because it can show how well you can handle emergencies or unexpected events when the situation calls for it. Start by building an emergency fund, then other types of liquid assets before building up things like retirement funds. That way, you can ensure you’re prepared for all of life’s curveballs no matter when they happen.
Of course, understanding liquid assets isn’t the only part of personal finance you need to know about. Check out RocketHQSM’s financial learning center for more insights on how you can become more financially secure.
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