Liquid assets are kept in cash form or can be quickly converted to cash while still retaining their value. Their usefulness in covering expenses and emergencies makes them crucial parts of all investment portfolios. To a large extent, liquidity is an umbrella term. Some liquid assets are easier to convert to cash than others. The term also partly covers illiquid assets, which are difficult to value or convert to cash. What Is Liquidity? Liquidity refers to the quality of assets exchanged for cash. There are varying levels of liquidity: the easier it is to exchange an asset for cash, the greater its liquidity. On this note, cash is the asset with the most liquidity. It is effortless to access cash in bank or credit union accounts. Though holding some liquid assets for expenses and emergencies is essential, there is a cost to keeping them. Liquid assets generally lose their value over time. The more liquid an asset is, the riskier it is to hold it for a long time. Cash and other completely liquid assets may also be affected by inflation. To reduce the risk with liquid assets, you may have to reduce your liquid assets and invest in assets that help you grow wealth over time. These include securities and real estate properties. What Are Liquid Assets? Liquid assets are assets that you can easily convert to cash. Though all assets can be exchanged for cash, some cannot be converted without the risk of value loss. Here are some common examples of liquid assets: • Money • Treasury bills and Treasury bonds • Certificates of Deposits (early withdrawals may attract a penalty fee) • Stocks • Exchange-Traded Funds (ETFs) • Mutual Funds • Money Market Funds • Precious Metals
The Liquidity of Financial Accounts Your financial accounts also hold varying levels of liquidity. Here is a breakdown: • Checking accounts: you can easily pay for goods and services from your checking accounts. The liquidity of checking accounts is closest to cash. • Savings accounts: less liquid than checking accounts. The federal rules guiding savings accounts limit convenient monthly withdrawals to six. • Money market accounts: access to funds in these may require debit cards and checks. • Cash management accounts: have similar liquidity benefits with checking accounts but with higher interest rates. Some cash management accounts have low withdrawal limits. • Taxable investment accounts: are fairly liquid investment accounts available through brokerages. They hold stocks, ETFs, bonds, and mutual funds. Trading commissions, sales fees, and poor market conditions can reduce the value of assets stored in these accounts. • Tax-advantaged accounts: have less liquidity than taxable investment accounts but may hold similar assets. • Trusts: trust accounts have varying levels of liquidity, with some having tighter controls than others.
Illiquid Assets Illiquid assets are at the far end of the liquidity spectrum. You cannot easily exchange them for cash. Examples include: • Real estate properties • Collectibles • Stock options • Private equity • Estates • Intangible assets
Building Liquid Assets Having a percentage of your total wealth in liquid assets is crucial to achieving your short and long-term financial goals. Having enough cash in and out of your checking account will help you manage expenses and emergencies. Experts suggest having three to six months of your expenses in liquid assets as your emergency fund. It will come in handy if you lose your job or have trouble meeting your financial obligations. If you don’t have enough saved up for emergencies, you can try to convert some of your illiquid assets to cash. You can start setting aside some money for emergencies if you don’t have illiquid assets that you can exchange for cash or want to leave as illiquid assets. You can keep the money in a high-yield savings account. As soon as you have enough money saved up for emergencies, you may want to concentrate on building less liquid assets to grow your money without the risk of value loss.
Contact Information:
Email: [email protected]
Phone: 4022508277
Bio:
Carl Wyllie is an advisor focused in areas of Medicare, retirement, estate planning, and crisis planning. Carl works with individuals of all ages in planning for their retirement. He is uniquely effective in building working relationships between their families and elder care law attorneys to assist them in avoiding a healthcare crisis. Carl is particularly sensitive to helping provide the means for his clients to maintain their independence and dignity when a change in their health occurs due to the natural aging process.
