A liquid asset isn’t something you serve in a champagne glass at a party. It's an account or low-risk investment you can quickly and easily convert to cash with little or no penalty. Examples of liquid assets are Treasury bills, savings accounts and money-market accounts. Flexibility and accessibility are just two of the ways liquid assets can help you stay ahead in the financial game.
Emergencies can hit you without warning. When they do, you'll want some liquid assets on hand to serve as an immediate financial cushion. That's in contrast to non-liquid assets, such as real estate, that may be more valuable but will require some time to sell. For example, assume you have $25,000 in a money-market account and you lose your job. That money is immediately available to help you pay your bills while you look for your next opportunity.
Ready to Strike
Holding liquid assets, such as a money-market account, can benefit your investment portfolio. You can use the liquid asset to buy new investments at the optimal time without needing to sell other investments. You can sell those other investments on your own schedule. For example, if you hold a portion of your portfolio in a money-market account and discover a hot stock, you can buy that stock without selling your other stocks or investments.
Since liquid assets can be sold swiftly and at a full value, they typically carry a lower risk than non-liquid assets during times of market uncertainty. When investors get nervous, such as during a financial crisis, you might be able to sell a non-liquid asset but only for a steep loss. Some liquid assets, such as a savings account, are insured by the federal government up to a certain amount. You can sleep well knowing they're safe and have little chance of losing value.
Stronger Financial Profile
When you apply for a loan, such as a mortgage, liquid assets can increase your chances of approval. They show you have the discipline to put money away and are more likely to make your payments. In some cases, a mortgage lender could require you to have three months worth of living expenses in liquid assets. You'd score even more points with that lender if you can prove you have six months of expenses in a savings account.
- Personal Financial Planning, Seventh Edition; G. Victor Hallman and Jerry S. Rosenbloom
- Expected Returns: An Investor's Guide to Harvesting Market Rewards; Antti Ilmanen
- National Bureau of Economic Research: Illiquidity Raises Investment Risk
- Real Estate Principles; Rockwell Publishing
- The Naked Truth About Your Money; Bill DeShurko