Access to cash can make or break your ability to survive financial emergencies or even secure a mortgage. But access to cash doesn't always mean having currency in your wallet. Liquid assets are assets like cash, checking accounts and certain investments that can be quickly and easily converted to cash with little or no cost.
Cash, of course, is the most liquid asset of all, and it's the yardstick used to measure liquidity. Funds held in checking, savings and money market accounts can also be considered liquid because they are easily converted to cash.
In addition, several other types of liquid assets serve as cash equivalents. A cash equivalent is an investment with a short-term maturity that can be turned around to cash quickly.
Here are some examples of other types of liquid assets that serve as cash equivalents.
Certificates of Deposit
Investing in a certificate of deposit allows you to save your money for a set amount of time referred to as a term. Because this type of account requires you to lock up your money for a specific term and often has early withdrawal penalties, CDs are slightly less liquid.
Stocks and Marketable Securities
Marketable securities, such as stocks, are another type of cash-equivalent liquid asset. These are financial instruments that one can easily purchase or sell in the market.
This type of investment falls on cash-equivalent middle ground because its value is determined by market activity at the time you need the cash.
While mutual funds can be easily sold for cash, the value of these assets is sensitive to any downturns in the market, limiting the amount of cash you can access.
Short-Term Government Bonds
Treasury bonds are also a form of cash-equivalent liquid asset. They're easy to buy and sell without any significant swings in prices. They pay interest regularly -- so often, you will know the cash amount to expect once the bond matures.
Nonliquid assets are assets that are difficult to sell for full value or take time to sell. For these kinds of assets, it can also be harder to predict what they will sell for. Examples of nonliquid assets include:
Liquidity is an important factor to consider when investing. Your portfolio's liquidity determines how quickly you can access your money -- which is something you may need to do if an emergency arises. Likewise, when investing in a company, you'll want to evaluate its liquidity, as this can be an indicator of its overall financial health.
Investors typically maintain a balance of liquid and nonliquid options, but your investment mix may change as you age. Younger investors might prefer less liquid investments, whereas a retiree's portfolio might include more 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 they still fulfill your investment strategy and liquidity needs.
HOW TO REBALANCE YOUR ASSETS
- Compare your chosen mix to your current mix.
- Identify asset imbalances.
- Rebalance your portfolio using one of two methods.
- The percentage-based method involves rebalancing whenever your allocation shifts above or below your chosen percentage.
- The time-based method involves rebalancing your portfolio on a set schedule, such as every six or 12 months.
Investors should also consider corporate liquidity, which is a company's ability to pay its bills. Analysts measure this kind of liquidity by dividing the company's 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 nonliquid ones can prepare you for emergencies while helping you reach your long-term financial goals.
This article has been updated with additional reporting since its original publication.
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