Liquid Assets: What You Need To Know

Increasing your income and living within your means are important metrics of financial success. But when a financial emergency arises, you want to have liquid assets to cover those expenses and help you get by. Let’s look at the definition of liquid assets and why they’re a crucial part of your financial well-being.

What Are Liquid Assets?

Liquid assets are cash or assets that can be easily converted into cash in an emergency, like money market accounts, CDs and Treasury bills. Liquid assets are an important aspect of your net worth and an indicator of financial stability.

For an asset to be considered liquid, it must meet certain criteria. First, there must be an established market of buyers or sellers for this asset, and there must be a large number of people willing to purchase it.

Without an established existing market, it’s hard to quickly convert an asset to cash. If ownership of the asset can easily be transferred, this is another way to make it liquid.

Why Are Liquid Assets Important?

Businesses often talk about the importance of having liquid assets, but they are necessary for individuals as well. If a financial emergency hits, liquid assets can quickly be converted into cash, so you don’t have to rely on credit cards. 

A 6-month emergency fund is an example of a liquid asset. If your car unexpectedly breaks down or you receive a large hospital bill, you can rely on your emergency fund to pay that expense.

How To Calculate Your Net Worth

You can calculate your net worth by subtracting your total liabilities from your assets. An asset is any resource that holds financial value, like stocks, savings and real estate. Liabilities are any debts or resources you owe to someone else.

For example, let’s say you have the following assets on hand:

• Check account: $50,000
• Emergency fund: $20,000
• Stocks: $20,000
• Bonds: $5,000
• Home: $200,000 

You’re also responsibilities for the following liabilities:

• Credit card: $3,000
• Student loans: $30,000
• Mortgage: $150,000 

Your total assets equal $295,000, and your liabilities equal $183,000. When you subtract your liabilities from your assets, you get a positive net worth of $112,000.

What Are Some Examples Of Liquid Assets?

When most people hear the term liquid assets, they immediately think of cash. But there are actually many different types of liquid assets. Let’s look at a few liquid asset examples.

Cash And Cash Equivalents

This can either be cash you have on hand or something that can be immediately converted into cash. For example, Treasury bills and short-term bonds are considered cash equivalents.

Bank Accounts

Any money sitting in a checking account, savings account or money market accounts is considered a liquid asset. That money can be withdrawn from your account with minimal restrictions.

Mobile Payment Accounts

Money sitting in peer-to-peer accounts like Venmo, Cash App and PayPal are also liquid assets since the funds can easily be transferred out of your account.

Investments

Certain investments, like bonds and marketable securities are considered liquid assets. Other income-producing assets like mutual funds, ETFs and stocks may be considered liquid if they can easily be sold and converted into cash.

Examples Of Non-Liquid Assets

Your net worth measures any liquid and non-liquid assets you own. Non-liquid assets can’t be easily converted into cash without losing a significant portion of your investment. Here are some examples of non-liquid assets.

Real Estate

Real estate investments aren’t considered liquid assets since it can take months to receive cash from the sale of the property. Plus, real estate can lose its market value if interest rates are high and there aren’t enough interested buyers on the market.

Vehicles

Vehicles like cars, trucks, boats and personal aircraft are also considered non-liquid assets. Vehicles are often easier to sell than real estate, but it will still take time to receive cash from the sale. And vehicles depreciate in value, so you could lose money on the sale.

Collectibles

Collectibles aren’t considered liquid assets because there are a limited number of buyers for these sorts of items. It can be hard to determine the value of collectibles and they can be difficult to resell.

How To Increase Your Liquid Assets

If most of your assets are non-liquid, it’s a good idea to start building your liquid assets. The easiest way to get started is by building an emergency fund with at least 6 months’ worth of expenses. This money should be kept in an account where it can be easily accessed and withdrawn if necessary.

Once you have an emergency fund in place, you can begin building up other liquid assets like CDs, bonds and mutual funds. These accounts can serve as a backup for your emergency fund.

FAQs: Liquid Assets

Having liquid assets will make you more financially stable since you’ll be better able to weather financial instability. If you have more questions about liquid assets, the following information may help.

What are examples of liquid assets?

Liquid assets are cash or any assets that can be quickly converted into cash. Cash is the most liquid asset, but money market accounts, Treasury bills, bonds and mutual funds are also examples of liquid assets.

Should I have more fixed assets or liquid assets?

It’s important to have a balance of fixed and liquid assets. Liquid assets provide you with more financial flexibility, but fixed assets help you build long-term wealth.

Is my car a liquid asset?

No, vehicles aren’t considered liquid assets since it takes time to receive cash from the sale. And you may also incur some costs in the process of selling your car.

Is my house a liquid asset?

No, real estate isn’t considered a liquid asset since it can take months to receive cash from the sales of the home. And in some cases, you may have to sell the home at a loss.

Is my 401(k) a liquid asset?

A 401(k) is not a liquid asset since it can’t be quickly converted to cash. Plus, 401(k)s charge hefty penalties for withdrawing the funds early. Other retirement accounts like IRAs are also non-liquid assets.

The Bottom Line: Building Liquid Assets Can Be A Smart Financial Move

Liquid assets can be easily converted to cash and will help you be more financially secure. Having cash on hand ensures you can weather financial emergencies without going into debt. If you’re looking for ways to track your net worth and manage your expenses, be sure to download the Rocket Money℠ app.