Liquid Assets Explained: What They Are and Why They Matter
A liquid asset is cash or any asset that can be quickly and easily converted into cash without causing a significant loss in value. Assets that are considered liquid typically trade in active markets where there are many buyers and sellers, allowing them to be sold rapidly at a fair market price.
Your net worth represents the total value of everything you own minus everything you owe. Assets can include cash at home, money in bank accounts, property, vehicles, jewelry, or artwork. However, not all assets provide immediate access to cash when you need it.
This is where the difference between liquid and non-liquid assets becomes important. Liquid assets give you quick access to funds whenever necessary. In contrast, non-liquid assets may take time to sell. For example, during a financial emergency, withdrawing money from a savings account is much easier and faster than selling real estate and waiting for a buyer.
What Qualifies as a Liquid Asset?
Cash is naturally the most liquid asset available. In addition, many widely traded financial securities are also considered liquid assets, such as:
- Physical cash (banknotes, coins)
- Cash in a bank account
- Cash equivalents: money market instruments
- Marketable securities: stocks, treasury bills, bonds
- Exchange-traded funds
- Foreign currencies
- Mutual funds
What is the opposite of liquid assets?
The opposite of liquid assets are non-liquid assets; this covers all assets that cannot easily be converted into cash. It either takes too much time or is too costly to sell them, and sometimes it may be outright impossible.
Examples of non-liquid assets:
- Jewelry
- Cars
- Artwork
- Real estate
- Equipment and machinery
- Land
How much liquid assets should you have?
Liquid assets are an important part of any investment portfolio. They are used to quickly meet financial obligations if necessary. They also protect an investment position against unpredictable adverse events.
You have to be financially prepared for unanticipated life events like losing your job, having an accident, getting a large bill out of the blue or facing a changing family situation. So be aware of the potential financial impact of these events and always keep an ample amount on your bank account. But having a healthy balance of various asset classes is probably the most important. If you keep too much of your money in cash, you may miss out on growing your wealth, as these funds could be invested at a higher return elsewhere.
What else do you need to know about assets and asset classes?
If you’d like to broaden your knowledge, check out the following articles:
- Investment Asset Classes
- What is an asset manager?
- What are tangible assets?
- What are alternative investments?
- Are stocks liquid assets?
- What is asset allocation?