Financial liquidity is a simple concept: It refers to an asset that can be quickly converted into cash. The easier and faster an investor can exchange an asset for cash, the more liquid it is.
Financial advisors often tell their clients that liquid assets are for unexpected events: A car breaks down, there’s an unplanned medical expense, a family breadwinner loses a job. Liquid assets are a financial cushion. But they also give someone the ability to invest quickly and take advantage of new opportunities.
Cash is, of course, the ultimate liquid asset. Money-market accounts, marketable securities, checking and savings accounts—all of these offer quick access to cash. Experts feel it’s important to have cash on hand or assets that are liquid enough to cover life’s basic planned expenses (mortgages, rent, household expenses), as well as assets that can be converted to cash.
But there’s a tradeoff: Greater liquidity can mean lost purchasing power as inflation erodes an asset’s value, especially cash. This is why investors often balance their liquid assets against investments that are less liquid but have greater potential for appreciation.
Examples of liquid assets
The financial markets can attach a value to almost every asset, but not every asset can be sold for cash quickly or without losing money on the sale (or incurring a withdrawal penalty). Here are some liquid assets examples.
- Cash. Cash is already liquid, whether it’s in the form of currency or sitting in a checking or savings account, a money-market account, or even in a peer-to-peer payment app. Because no conversion is needed, cash can be used to pay for things instantly and is therefore considered the most liquid of all assets.
- Stocks. Stocks can be bought and sold on stock exchanges almost as quickly as cash can trade hands. Publicly traded stocks are a liquid asset, although an investor who sells an equity will likely wait for a few days to receive the cash from the sale. There also is the risk that they may only be able to sell for less than they paid.
- Exchange-traded funds. Exchange-traded funds, or ETFs, are funds that track an index, sector, or other asset, but trade like stocks on public exchanges. Because of this, they’re relatively easy to sell quickly and convert to cash—although like stocks, if investors need to sell an ETF in an emergency, they may sell at a loss.
- Treasury bills and Treasury bonds. Government-backed securities are sold at regular auctions by the U.S. Treasury. It’s easy to sell them for cash if an investor needs money before they mature. T-bills mature within four weeks to a year, while Treasury bonds have longer terms (as much as 30 years), but offer higher interest payments.
- Certificates of deposit. Some people put cash in CDs as an alternative to savings accounts, because they can earn more interest. However, they’re not as liquid as savings accounts, because they come with various fixed maturity dates and investors incur penalties if they need to withdraw before that date.
- Bonds. These assets are fixed-income investments in which investors loan money to a corporation, government, or agency until an end date, when the investor collects their principal and fixed interest. Many bonds are fairly liquid, because there’s a large secondary market for bond trading.
- Mutual funds. Mutual funds, or managed portfolios of investments made up of different financial securities, are considered liquid because investors can readily sell their shares. They’re a bit less liquid than stocks and ETFs, because they trade only once a day.
- Money-market funds. Money-market funds, a type of mutual fund that owns liquid assets such as cash, CDs, or bonds, are low-risk (but low-yield) investments. Investors can sell their shares and receive proceeds from the sale within a day or two.
- Gold and silver. In theory, gold and silver should be as liquid as cash, because the metals trade on exchanges, much like stocks. And indeed, securities tied to the metals do trade freely, like other commodities, with value determined by what’s known as the spot price. But the physical metals themselves trade hands less frequently. An investor’s precious metal or coins can be less liquid than another kind of investment because of the time it can take to get them out of storage and exchange them through a dealer.
What are non-liquid assets?
In contrast to liquid assets, non-liquid—also called illiquid or fixed—assets, can’t be converted into cash quickly. Depending on the asset, a sale can take months or even years to complete.
Non-liquid assets include tangible items such as equipment, land, real estate, art, vehicles, collectibles, and jewelry. These require both effort and time to sell and convert to cash.
Some less concrete assets are non-liquid as well, such as ownership in private companies, some debt instruments, and stocks that trade on over-the-counter markets.
Certain circumstances can contribute to the illiquidity of a fixed asset. A valuable piece of art or a piece of jewelry may hold its value over time. But these often have a limited pool of potential buyers, which lowers their liquidity.
Why asset liquidity matters
The financial crisis of 2007-09 and the COVID-19 pandemic highlighted the importance of liquid assets. They exist to give people immediate, or near-immediate, access to cash for emergencies. The amount of money people decide to keep liquid, though, is based on their own assessments of their job security; whether their house and cars are paid off; how much health coverage their insurance provides, and so forth.
Liquid assets are useful for other reasons, too. For instance, securing a loan to buy a property may require a cash down payment. Holding large amounts of liquid assets also can help a borrower secure a loan more easily or on better terms.
FAQs about liquid assets
Assets vary in their degree of liquidity, and some are easier and faster to convert into cash than others. Here are some common questions about liquid assets:
Is gold a liquid asset?
Gold and silver coins are currency, and in theory are as liquid as any other form of cash (although almost no one uses them in this way anymore). Precious metals become less liquid when they aren’t used as currency; they must be removed from storage and exchanged for cash through a dealer.
Is a 401(k) a liquid asset?
A 401(k) is a tax-deferred retirement account typically offered through an employer. It’s less liquid than a taxable investment account because the tradeoff for the tax benefit usually includes penalties for withdrawal before age 59 1/2.
Is a house a liquid asset?
Real estate is considered a fixed or non-liquid asset, because a sale to convert the asset into cash can take weeks, months, or years. Some people choose to tap the equity in their property through a home equity loan or line of credit, but the home itself is still considered a fixed asset.
Is a checking account a liquid asset?
Checking accounts hold cash that can be instantly withdrawn via debit card, peer-to-peer payment apps, or by writing checks. They’re as close to cash as an asset gets.
Is a savings account a liquid asset?
Savings accounts are slightly less liquid than checking accounts. Federal Reserve Board’s Regulation D prevents account holders from making more than six withdrawals or transfers per month from a savings account. This same rule applies to money-market accounts. There are some exceptions, but the general idea is that savings accounts are liquid—just not as accessible as checking accounts or cash.
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