A liquid asset is anything that you currently have in your checking and savings account or any possessions that you own that can easily be converted to cash within a short period of time.
This particular type of asset is usually regarded as cash, due to the fact that its value will be the same when sold. However, there are various factors that must be considered before an asset is considered liquid. First, there must be an established market with a large number of interested parties ready to buy. Lastly, this asset must also be easily transferable.
This type of asset is crucial to have, simply because this can mitigate or settle any liabilities that you may encounter in a short period of time. Liquid assets are very important to individuals and businesses because they are the first source utilized to meet any payment obligation.
In this article, we will cover the importance of liquid assets and help you differentiate liquid and nonliquid assets so you can better understand your financial situation.
What Are Liquid Assets?
Liquid assets are possessions that an individual owns that can be converted into cash within a short period of time. When speaking about liquidity, cash will always be king. Even though your particular asset may not be in the form of cash, it’s still regarded as such because it can quickly be converted into cash.
This is also known as a cash equivalent because the owner is confident that their possession can be exchanged for cash in a short period of time. However, in order to determine if an asset qualifies as liquid, there are several factors that must be present. As stated before, there must be a large market and demand for that particular asset to be sold to interested parties. To also ensure that the asset is liquid, the transfer must be easily facilitated as well.
9 Examples of Liquid Assets
Cash is king and if you need to liquidate assets to mitigate or settle any liabilities, these assets below can do just that.
- Cash: Any amount in your checking and savings account or any cash you have on hand.
- Money Market Assets: A mutual fund that’s designed to be low-risk, liquid, and a short-term investment.
- Marketable equity securities (stocks): An investment of shares of common stock and most preferred stock which can be bought, sold, or traded on public exchanges.
- Marketable debt securities: Any short-term bond that’s been issued by a public company and is held by another company.
- Treasury bond (Secondary Market): A government debt security that earns interest until maturity where the owner can then be paid equal to the bond’s principal.
- Mutual Funds: A pool of money that has been collected by investors that are investing in stocks, bonds, and other types of assets.
- Exchange-traded funds (ETFs): A type of investment fund that is traded on the stock exchange.
- Accounts receivable: The amount of money that is due to an entity for goods or services delivered that have been used but not paid for by the customer.
- Inventory: The amount of goods and materials and individual or business has that they are available to sell.
Examples of Investments That Are Considered Liquid Assets
When it comes to your investments, you may want to know which are considered liquid assets. Below we provide a list of investments that can be readily converted into cash in a short period of time.
- U.S. Treasuries and Bonds: Highly liquid on the secondary market and is issued by the U.S. Government with very little risk of default.
- Mutual Funds: A managed portfolio of investments where invested parties can sell their shares at any time and receive their money within days.
- Money-Market Funds: Similar to mutual funds due to their low-risk and low-yielding investment. Invested parties can also sell their shares and receive money within days.
What Are Non-Liquid Assets?
Non-liquid assets (stocks, bonds, etc.) can be challenging to sell or liquidate quickly. The owner of these particular assets will not receive payment for weeks and in some cases months. Even though there is a market and interested parties for these assets, the sheer time it takes to receive a payment is the reason why some assets are not considered to be liquid.
Imagine that a family owns a house or property and they would like to liquidate because they have to pay off a debt obligation in a short period of time. The process of selling this asset may exceed their projected timeline because they have to find an investor or interested party, negotiate on the price, and then prepare the closing sale. Due to the fact that the family will not receive cash in a short period of time, this particular asset is considered to be non-liquid.
5 Examples of Non-Liquid Assets
When you need cash quickly to settle or mitigate a liability, it’s good to know which of your assets won’t help you. Below are a list of illiquid assets that take more time and resources to sell than liquid assets.
- Real Estate: Land and homes hold considerable value and takes time to sell. Therefore, this is considered one of the most non-liquid assets.
- Cars, RVs, and Boats: Also has strong monetary value and can take a considerable amount of time and resources to sell.
- Jewelry: Also can have strong monetary value and in some cases, you will need to find a buyer or broker to handle the transaction.
- Furniture and Collectibles: Similar to jewelry, these can appreciate in value very quickly. Therefore, you may need to go through a broker.
- Retirement Accounts (401ks, IRAs, and Investment Accounts): These long-term investments will grow over time and are intended to fund your retirement. As a result, if you take money out early, it can be included in your taxable income and incur an additional 10% tax penalty.
3 Tips to Build Liquid Assets
- Trim Expenses: The less money you spend, the more you can build in your net worth. To do this, perform a budget review and cut back on extraneous payments such as an additional car or be more cognizant of your spending habits.
- Divide Liquid Assets Into Buckets: If done correctly, you can create four buckets to put your money in: the cash bucket, the growth bucket, the income bucket, and the alternative income bucket. Dividing your assets will make it more difficult to spend.
- Pay Off Your Mortgage: Getting the biggest debt off your books or simply starting biweekly mortgage payments can accelerate your mortgage payoff.
When you find yourself clamoring for cash, it’s always good to know which of your assets can sell quickly to thwart additional liabilities. Before you make any spontaneous purchases or additional investments, you should consider the liquidity of a potential asset — it can either become a help or burden to you in the future.