Liquid assets are things that can be quickly converted into cash without losing value. These come in many different forms, such as cash, stocks, other marketable securities, money market funds and more. Liquid assets are different from their illiquid or fixed counterparts. These are investments that take much longer to convert to cash, typically due to a lack of buyers. A financial advisor can help you determine how much of your assets should be liquid.
What Kinds of Assets Are Liquid?
Think about what assets you have within easy access that, if needed, could pay for something within a relatively short amount of time. Some examples of these liquid assets are cash, checking accounts, savings accounts and some investment funds.
Knowing the total value of your liquid assets can be especially helpful if you’re struggling to pay for something in a sudden pinch. That makes them especially valuable additions to your emergency fund. Let’s take a look at the two most common types of liquid assets.
Cash and Cash Equivalents
Cash is your most liquid asset because you don’t need to take further steps to convert it – it’s already cash. You can use it to pay for a good or service immediately and also use it to settle any outstanding debts. Cash is usually held in checking accounts, savings accounts or money market accounts. You can withdraw money from them quickly in order to pay for debts or other liabilities.
Other funds, like a trust fund, tax refund, court settlement and some certificates of deposit (CDs) are included within the designation of cash-like accounts. Even though they are not cash, they can be relatively easy to convert into cash so that you can go through with a transaction as quickly as possible. In the case of a CD, note that it depends on the rules of the account; in many cases, there is a punishment for withdrawing your money before the term has elapsed.
Taxable Investment Accounts
If you have a variety of different investment accounts, you can liquidate them and convert them into cash a little less quickly than some of the accounts mentioned above, but still within a reasonable amount of time. Investment accounts can turn into cash within a couple weeks or months and are therefore firmly liquid assets. Investment accounts can contain a variety of securities, including:
- Stocks
- Bonds
- Money market funds
- Mutual funds and other types of stock market investments
While investment accounts are liquid, you shouldn’t rely on them in the same way that you rely on your cash accounts. That’s because investments in securities involve a risk of loss, meaning you could lose some of your money if the market goes down. You can liquidate your investments, but you may not get as much cash as you put in.
Generally speaking, only taxable investment accounts are considered truly liquid. That’s in contrast to tax-advantaged retirement accounts, which vary in liquidity but generally limit your ability to liquidate your assets. IRA plans cannot be considered liquid if you haven’t reached the qualifying retirement age, because you’d still be obliged to pay the IRS early withdrawal penalties. But you can claim a hardship withdrawal if your situation warrants a waiver of the 10% penalty for an early withdrawal.
Cash Equivalent Business Assets
Businesses have liquid assets that are cash equivalents, or that can be sold for cash pretty easily. Some examples of these assets are accounts receivable and inventory. With accounts receivable, it is cash that customers owe the business. You can get financing based on this amount that is owed and you should be able to collect all or most of that amount in the future.
Inventory, it is a good that has a certain value that can be sold for cash. Both of these assets are typically appraised at a lower value than the value of the business attributes to each because both have to be converted to cash.
Liquid Assets vs. Fixed Assets
Fixed assets, which are sometimes called illiquid assets, are investments or other assets that cannot be liquidated quickly. For instance, your house, while likely worth a substantial amount of money, would be difficult to sell on short notice. As a result, when someone is looking to sell a fixed asset within a short period of time, they may be forced to accept less due to the lack of a large market.
Here are a few examples of fixed assets:
- Your home and other real estate properties
- Antiques
- Jewelry
- Furniture
- Cars
One thing you’ll notice is that most of the assets above have somewhat consistent prices and stable markets. However, the ability to sell your gold necklace, your car or another fixed asset is often hindered because finding a buyer can be tough.
On the flip side, liquid assets are sellable nearly at a moment’s notice. For example, if you have money tied up in stocks and bonds, you can simply sell those investments and gain access to your cash within a fairly short time frame.
How to Build Your Liquid Assets
Building your liquid assets essentially means that you’re giving yourself a financial insurance plan. In the case of an emergency, you’ll have money on hand to cover yourself and/or your loved ones through any major or unexpected incidents.
Take a look at your assets and rank them in order of liquidity. If you don’t have any cash to cover an emergency, start with that: an emergency fund. Add to this as much as you possibly can. A comfortable amount would cover your basic needs and expenses for three to six months if you lost your job. And that amount, of course, is not the same for everyone. It varies based on factors such as your specific monthly expenses, family and your living situation.
An emergency fund may be the easiest way to start building liquid assets, but there are other ways, too. You can try a hands-off robo-advisor or use a variety of tools, like mobile banking apps to investment apps – that don’t require more than a couple dollars to try. You can also use a budgeting calculator to do some short-term planning and an investment calculator to get a sense of how your assets could grow over time.
Bottom Line
Making sure you have plenty in cash and other liquid assets is crucial – not just to cover everyday expenses, but also to allow you to handle an emergency or big life change. Understanding which of your assets are more liquid than others will save you time – as well as potential obstacles – in the long run.
For instance, when you apply for a mortgage, lenders can look at the number of liquid assets you have. They do this to ensure that should anything happen, you’d still be able to continue making monthly mortgage payments. Lenders may also evaluate you in the same way when you apply for a car loan.
Tips for Managing Your Finances
- Everyone’s financial goals and needs are very different, which is why the right amount of assets to keep liquid is going to vary widely by individual. A financial advisor can help you figure out the right amount and place for your liquid assets. Don’t have an advisor yet? Well, finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Once you’ve got a strong emergency fund, work on investing for your future and retirement. Set up an employer-sponsored 401(k) and take advantage of your job’s company match if there is one. You should also be actively contributing to an IRA, as well as investing in some riskier securities if you’re younger.
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