What is a liquid asset?
A liquid asset is something that you own that can be easily converted into cash and that too in a short amount of time (less than 90 days). Assets that can be considered as liquid assets are cash, checking or savings accounts as well as certain types of investments. All these assets are summed up and the liabilities are subtracted while calculating a person or business’ net worth. While it’s important to know what your net worth is, liquid assets are much more important as they tell you how much cash you’d have quick access to in case you are stuck in a tough spot.
Investments Considered as Liquid Assets
Any asset with short term maturities can be considered a liquid asset but some of the most common examples of liquid assets are given below:
Cash
Money market funds
Marketable equity securities (Stocks)
Marketable debt securities (Bonds)
Exchange-Traded Funds (ETFs)
Accounts receivable
Inventory
A certificate of deposit account, as well as certain types of retirement accounts, can be considered liquid depending on their terms. If you are wondering why real estate isn’t a part of the above list, then keep in mind the fact that it takes a long time to sell a property and you might not get its market value especially when you are trying to sell it quickly.
Why are Liquid Assets Important?
Liquid assets can prove to be very helpful and important in case of financial emergencies. When you encounter a hardship like the recent Covid-19 pandemic, you need quick access to funds so you can pay for your essentials, bills, employee salaries and for financing unexpected medical treatments that might cost a fortune. Also while applying for a mortgage, your lender will verify all the assets that you own and how liquid they are to analyse how much easily accessible cash you have to cover your mortgage payments in case your regular cash flow stops for some reason.
Lastly, having a sufficient source of liquid assets will result in a healthy financial profile. Generally, you can’t predict hardships but with enough liquidity, you will have enough resources to go through that while giving you some peace of mind.
