What Are Liquid Assets?

Learn what assets meet the liquid assets definition.

Access to cash can make or break your ability to survive financial emergencies or even secure a mortgage. But access to cash means more than having currency in your wallet. You can convert your assets to cash, and the ease with which you can do so depends on their liquidity.

Read on to learn more about the difference between liquid assets and non-liquid assets, and how you can use both to meet your financial goals.

Liquid Assets Definition

Liquid assets are assets that can be converted to cash quickly and easily with little or no cost. Types of liquid assets run from cash itself and common bank products to more complex investments.

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Examples of Liquid Assets

Cash, of course, is the most liquid asset of all, and its the yardstick used to measure liquidity. Here’s a list of other liquid assets:

  • Savings accounts
  • Checking accounts
  • Money market accounts

In addition, several other types of liquid assets serve as cash equivalents. Although access to your money might take a few days, and you might pay a small penalty, you can get your money out of these assets quickly and with little loss in value.

Here are some examples of other types of liquid assets:

  • Certificates of deposit
  • Marketable securities
  • Short-term government bonds

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Examples of Non-Liquid Assets

Non-liquid assets are assets that are difficult to sell for full value or take time to sell. This category of assets includes:

  • Real estate
  • Jewelry
  • Commodities

Liquidity and Investing

Liquidity factors into investing in two ways. First, your portfolio’s liquidity determines how quickly you can access your money. Second, the liquidity of the companies you invest in impacts whether they’re safe investments.

Portfolio Liquidity

Investors typically maintain a balance of liquid and non-liquid investments. Younger investors might prefer less liquid investments whereas retirees might feel more secure with cash equivalents.

Over time, high-performing assets comprise a larger chunk of your portfolio, and the change will affect your investment mix. Milestones like homeownership or retirement might shift your priorities. Due to factors like these, you should review your portfolio from time to time and rebalance your assets to ensure that your investment mix still meets your needs.

Here’s how to rebalance your assets:

  1. Compare your chosen mix to your current mix.
  2. Identify asset imbalances.
  3. Rebalance your portfolio using one of two methods. Using the percentage-based method involves rebalancing whenever your allocation shifts above or below your chosen percentage. Using the time-based method involves rebalancing your portfolio on a set schedule, such as every six or 12 months.

Corporate Liquidity

Investors should also consider corporate liquidity, which is a companys ability to pay its bills. Analysts measure this kind of liquidity by dividing the companys liquid assets by its current and short-term liabilities. A liquidity ratio of one or higher indicates that the company is solvent.

Be Aware of an Asset’s Liquidity

You might need quick access to cash to cover your regular expenses or unexpected medical bills, to qualify for a mortgage or for many other reasons. Remember that liquidity impacts your financial health. Choosing the right mix of liquid assets and non-liquid ones can prepare you for emergencies while helping you reach your long-term financial goals.

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