We’ve all found ourselves in a financial bind before, whether it’s an unexpected medical bill, a leaky roof, or a broken-down car. Fortunately, if you hold liquid assets in your emergency savings fund, you can pay your debts quickly.
But if you value illiquid assets… Well, let’s just say it’s difficult to exchange paintings for medical treatment.
Confused? Don’t worry! We’re here to answer all of your questions. From “What are liquid assets?” and “Are liquid assets bad?” to “How do you increase liquid assets?” we have the answers you’re looking for.
How do liquid assets work?
Liquid assets are resources that you can convert into cash quickly. The key qualifier for a liquid asset is the ease at which it can be exchanged for cash and subsequently result in an increase of your bank account balance. But that’s not all there is to know about liquid assets! Let’s take a closer look.
Why is it important to have liquid assets?
Liquid assets provide essential… Well, liquidity! Whether you need to pay bills, cover emergency expenses, or want to take a vacation, liquid assets make these activities far more possible.
What qualifies as a liquid asset?
The ultimate liquid asset is, of course, cash. Other qualifying assets include:
- Checking, savings, and money market accounts
- Marketable securities like equities and debts
- Mutual funds and exchange-traded funds (ETFs)
- Inventory and accounts receivable for businesses
Examples of liquid assets
Many popular marketable securities, such as stocks and bonds, are considered liquid assets due to how easily an investor can trade their shares for cash. For example, stocks issued by big-name companies like Microsoft and Apple count as liquid equities because of their popularity. However, penny stocks, or stocks that trade for less than $5, might not count as liquid assets due to weaker demand.
Is a 401(k) a liquid asset?
Investment accounts known as 401(k)s are typically considered less liquid than other savings accounts because they are intended to remain untouched until you reach the age of retirement. If you choose to make early withdrawals, you might end up paying extra in taxes or fines. But once you retire, your 401(k) becomes a liquid asset.
What is the difference between liquid assets and current assets?
Both businesses and individuals hold liquid assets, but businesses define them differently. For instance, companies often consider holdings to be liquid if they can convert them to cash within one year. As such, inventory and accounts receivable are marked as liquid assets, or current assets, on their balance sheets.
Where do you keep liquid assets?
You’ll typically want to keep liquid assets in a checking account, savings account, or rainy day fund. You can also place your cash in other forms of security such as stocks and short-term bonds. But if you’re looking for somewhere to put your liquid assets, consider a RoarMoneySM account from MoneyLion!
For just $1 per month, you’ll gain access to a safe, liquid account for your money as well as perks like cash advances with InstacashSM. You can even sign up for a Credit Builder Plus membership for $19.99 per month and take out credit-building loans at a competitive APR!
What is the difference between liquid assets vs net worth?
Your liquid assets only comprise one part of your total net worth. But for most middle-class families, the bulk of their net worth is tied up in illiquid assets such as house and cars.
For instance, as of 2016, the average family’s net worth was about $87,000. But their liquid assets only clocked in around $4,000. In other words, their liquid assets were valued at less than 5% of their total net worth.
Things to consider with liquid assets
Since so many different assets can be considered liquid, there are plenty of nuances to take into consideration. Let’s explore a few of these details down below.
What constitutes a liquid asset?
The key component of a liquid asset is how easily you can turn your asset into cash. But other factors come into play, too, such as:
- Whether the asset has available buyers
- The ability to transfer ownership securely
- How long it takes to convert an asset to cash
Additionally, businesses may hold different definitions of liquid assets compared to individuals.
Are liquid assets bad?
Liquid assets aren’t inherently bad. In fact, you need them in order to pay bills. But only holding liquid assets, rather than investing in a house or retirement fund, may hinder you from growing your net worth. A mix of liquid and illiquid assets is key.
How do you increase liquid assets?
The main way to increase the liquidity of your holdings is to shift where you invest your money. For instance, if you invest a set amount of money every month, put a chunk of it in a savings account or demand stocks. Or you can simply sell some illiquid assets and move the money into more liquid holdings.
Advantages of liquid assets
The primary advantage of liquid assets is their ability to keep your cash readily available. Some liquid assets also carry less risk of loss, especially compared to illiquid assets, as liquid assets can more readily be converted to cash. And if you’re applying for a car loan or a home loan, having extra cash on hand might help you increase your approval odds and the amount of money you can pay as your down payment.
Disadvantages of liquid assets
Perhaps the biggest disadvantage of holding liquid assets is the low interest rates on most savings and checking accounts. Plus, inflation will lower the value of cash over time.
Liquid assets vs illiquid assets
If liquid assets are holdings that you can turn into cash quickly, illiquid assets are just the opposite. These items are valued for their greater potential for long-term gains, but at the same time, they can’t help you in the event of an expensive emergency.
Some of the most common types of illiquid assets include:
- Real estate, such as your family home or commercial property
- Equipment, such as factory or industrial equipment
- Expensive artwork or heirlooms, like paintings
What are liquid assets? Just one key to financial security!
Liquid assets are just one slice of the financial security pie. In addition to owning illiquid assets such as a house or car, keeping funds in your bank account can provide you with much-needed peace of mind. That said, if you’re not putting some money into investments, you might be leaving compound interest on the table. If you’re ready to build your financial safety net portfolio with liquid assets, a MoneyLion investment account is a great place to start!
