What Are Liquid Assets? Why They Matter

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 can be accessed quickly and easily with little or no cost — like cash, checking accounts and certain investments.

See: 3 Things You Must Do When Your Savings Reach $50,000

Read on to learn more about the difference between liquid assets and nonliquid assets, and how both can help you meet your financial goals.

What Are Examples of Liquid Assets?

Cash, of course, is the most liquid asset of all, and it’s the yardstick used to measure liquidity. Other assets are considered liquid because they’re easy to convert to cash. While some are slightly more liquid than others, the following assets are considered cash equivalents.

Checking Account

A checking account is an example of a demand deposit account — a type of bank account that lets you withdraw some or all of your money whenever you want. It’s about the most liquid asset you can have other than cash, because it provides multiple ways to access your money.

For example, you can write a check, withdraw cash from an ATM, cash a check at a bank branch or pay for purchases with a debit card. What’s more, banking regulations impose no limits on the number of transactions you can make from a checking account.

Savings Account

A savings account is also a demand deposit account, so you can withdraw your money on demand. However, a law called Regulation D limits certain convenience transactions to six per month.

Although Regulation D is currently suspended, some banks, such as Ally and Discover, still impose the limit. In addition, savings accounts usually don’t come with an ATM card, which means you have fewer ways to access your money than with a checking account.

Money Market Account

A money market account is a type of savings account that typically pays higher interest and often has check-writing privileges and an ATM card. Regulation D doesn’t limit ATM withdrawals from money market accounts, so that feature and check writing make money market accounts slightly more liquid than savings accounts.

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 than demand deposit accounts like checking, savings and money market accounts.

Stocks and Marketable Securities

Marketable securities, such as stocks, are another type of cash-equivalent liquid asset. These financial instruments are relatively easy to purchase or sell in the market.

This type of investment falls on cash-equivalent middle ground. You’re generally limited to buying and selling a security when the markets are open, and its value is determined by market activity at the time you need the cash. That means you might have to sell it for less than you paid for it.

Mutual Funds

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. And unlike individual stocks, mutual funds only trade once per day, after the markets close.

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.

The time to maturity is 30 years, but prior to that you can trade T bonds in the secondary market.

Types of Nonliquid Assets

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:

• Real estate

• Jewelry

• Commodities

• Vehicles

Investment Liquidity: Why Does It Matter?

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.

Portfolio Liquidity

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. It’s a good idea to review your portfolio from time to time and rebalance your assets to ensure that they still fulfill your investment strategy and liquidity needs.

Corporate Liquidity

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.

FAQ

Here are some quick answers to a few common questions about liquid assets.

• What are the five most liquid assets?

  • The most liquid assets are:

    • Cash

    • Checking accounts

    • Money market accounts

    • Savings accounts

    • Certificates of deposit

• Is my house a liquid asset?

  • No, real estate – including your house – is not a liquid asset, because it is difficult to sell quickly.

• Is a car a liquid asset?

  • A car or other type of vehicle is not a liquid asset. While potentially easier to sell than a house, it still takes time to trade your car for cash.

This article originally appeared on GOBankingRates.com: What Are Liquid Assets? Why They Matter