A liquid asset is cash or any asset that can be easily and quickly converted into cash at a reasonable price. The established markets of liquid assets typically have lots of sellers and buyers, allowing these assets to be quickly sold without a major loss of their value.
Your net worth is the value of all your assets minus all your liabilities. Your assets include the cash under your mattress, the money in your bank account, your house, your car and any jewelry or artwork you may own. However, not all of these assets can give you instant access to cash in case of an emergency.
Liquid assets differ from non-liquid assets in that they allow investors instant access to cash at any time. If there is a financial crisis and you need immediate access to funds, it's easier to withdraw money from your savings account than to put your property on the market and wait until you find a buyer.
What are considered liquid assets?
Cash is of course the most liquid asset of all, but most traded securities also fall into this category:
- 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:
- Real estate
- Equipment and machinery
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: