You’ve heard the term. “Liquid assets” is a phrase directly tied to the business world. The name can be deceiving.
We’re not talking water. We’re not talking about states of matter. We’re talking prime-time finance info.
So let’s talk.
Liquid assets are assets that can quickly be converted into cash. These assets can typically be sold without losing much value. Confused? You won’t be. Follow along for a deep dig into liquid assets, from why to have them and where to get them.
Liquid Asset Definition
Let’s repeat it. Liquid assets can immediately be converted to cash while still keeping their market value. A few other factors help determine liquidity.
- How established is the market?
- Is ownership easily transferable?
- How quickly can the assets be sold?
Let’s explore why liquid assets can be necessary for intelligent financing.
Why Are Liquid Assets Important?
Businesses use liquid assets as a safety net in case of emergency. But what really matters is individual protection.
Think back to Chem class. What’d they always say about liquids? Right, liquids fill the shape of their container. You can think about liquid assets in the same way.
Life is a scary, shifting thing. Consider this: Without warning, you could lose your job. Your boss calls you in for one meeting, and the next thing you know, you have no income to pay off your expenses. Financial problems are real. You need to prepare for them.
The faster you can adapt and fill the size of your new container, the better off you’ll be.
Cash and Cash Equivalents
Liquid assets come in many shapes and sizes. A few types of liquid assets include:
Yep, cash is the ultimate liquid asset. What quicker way to have short-term cash than already having it? You can immediately access cash in a bank account by using an ATM.
You don’t need to keep all your cash on hand. That kind of money can be a security issue, but it can also be illegal. You read that right. Keeping more than $10,000 without declaring it can lead to you behind bars.
So you can trust your money in the bank. Having money in a checking account is a safe, secure way to keep liquidity.
Gamestop memes aside, stocks keep you close to the dollar. Publicly traded stocks are considered very liquid. If you need, your stocks can immediately be sold for cash – getting you the money in a few days.
Don’t forget, when you buy stock in a company, you give yourself up to the company’s rise and fall. Don’t follow Reddit’s advice; diversify your portfolio instead; find trustworthy names. With a strong financing strategy, stocks can be precious in the long term and keep your liquidity high.
Got much gold? The legends are true. Gold and silver are precious and can immediately convert into money. In some states, gold and silver can be used as currency, meaning they’ll act as cash.
While it may be ambitious to fill your shelves with gold, these metals are a safe, surefire way of guaranteed money.
Certificate of Deposit
These CDs aren’t for playing music in your car. Certificates of Deposit are accounts you deposit money into with the expectation that it’ll be long-term.
You can pull cash when you want, meaning they are liquid, but you may not want to. CDs will typically incur penalties for pulling money early, which will likely be a few months of interest. If you’re scrapping for cash, you can remove the pin, but you may be better off finding your liquidity in other areas.
Let’s flip the script. A bond is an investment in which you (yes, you) loan money to a borrower. Like a stock, the hope is you’ll invest in a company and get your money back, *with interest*.
You can sell bonds if you need cash, but they may sell for less than you paid. While they’re liquid, it may not be the wisest decision.
Treasury Bills and Treasury Bonds are two of the most secure, liquid bonds with backing from the United States government. You can trust them. Even before maturity, you can sell them for cash. Talk about liquid.
Can you guess what “illiquid” or “fixed” assets are?
Yep. Fixed assets can’t convert into quick money. While investing in an illiquid asset may not seem advantageous, it can lead to higher earnings. Like anything, it’s a trade-off. Consider these types of investments.
- Real estate
These assets are fixed because they can take up to months for a transaction to complete. Selling your house isn’t an easy process. Finding a buyer ready to make such an investment can often be painstaking.
While you’ll need many fixed assets in your life – you want a car and a house, don’t you? - it’s essential to keep your profile diverse. Make sure you have both liquid and illiquid assets in your life.
Prepare Yourself; Be Liquid
As far as financial terms go, liquid assets are pretty easy to wrap your head around.
Businesses and individuals can protect themselves by keeping liquid assets. By trading public stocks and using bank accounts, it pays off to have money handy.
Don’t stress– since you’re just starting out, you shouldn’t have to worry. All you have to do is focus on yourself.
So keep calm and finance on. At EXTRA, we hope to make the financing world easier for you. Are you feeling overwhelmed? Don’t be. Financing can seem like a pile of terms, but the more you read, the more you’ll know.