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What is a ‘liquid’ asset? Definition and examples.
You may have an expensive home, luxury cars, and an impressive art collection — but if you don’t have savings in the bank, a single emergency could mean financial trouble.
That’s because cash, whether it’s under your mattress or in the bank, is a liquid asset. In other words, it’s there when you need it, ready to spend. On the other hand, it’ll take some time to sell the house, the cars, or the artwork when you need cash in a pinch.
Below, learn about what a liquid asset is, examples of liquid assets, and why they’re important.
What is a liquid asset?
A liquid asset is either cash or a cash equivalent — that is, something that you can easily convert to cash. Liquid assets include physical cash and money in your checking and savings accounts, as well as stocks, bonds, and other assets.
On the other hand, non-liquid assets are those you can’t easily convert to cash. These include assets such as your house, land you own, and collectibles.
A few factors play a role in an asset’s liquidity. These include:
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How fast the asset can be sold and converted into cash
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How easy it is to transfer ownership of the asset
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How much of an established market there is for the asset
Liquid assets can be sold quickly, are easy to transfer, and have an established market. However, liquid assets generally gain value more slowly than non-liquid, or illiquid, assets, so they can lose value to inflation over time. But that doesn’t mean you shouldn’t have liquid assets, as they’re what you use to pay for day-to-day expenses and financial emergencies.
Examples of liquid vs. non-liquid assets
Keep in mind that liquidity is relative. Certain assets are very liquid, some may be very illiquid, and many are somewhere in between. Even though assets aren’t strictly liquid or illiquid, certain assets and account types generally fall into one category or the other. Below are some common examples of liquid and non-liquid assets:
The importance of maintaining liquid assets
Liquid assets are a key part of your portfolio, regardless of your age. Not only do liquid assets allow you to pay for regular expenses such as groceries, bills, and rent, but they also create a critical cushion during emergencies. If something unexpected happens — like a medical issue, a car accident, or a broken furnace — having liquid emergency funds allows you to pay for necessary expenses without going into debt.
How to grow your liquid assets
You can grow your liquid assets beyond your existing checking account by consistently contributing to savings and other liquid accounts.
If you don’t yet have a dedicated emergency fund, start there. Experts recommend saving three to six months’ worth of essential expenses in your emergency fund. And keeping this money in a high-yield savings account not only ensures the funds are accessible but can also help your savings grow thanks to higher interest rates and the power of compound interest.
In addition to your checking account and emergency fund, you may want to continue building liquid assets. For example, if you want to buy a house in the next couple of years or plan to get married, having cash or cash equivalents can ensure you’re ready to make a purchase when the time comes.
Benefits and risks of liquid assets
Liquid assets have both advantages and disadvantages. On the plus side, liquid assets are easily accessible. Having liquid assets available means you can access cash on short notice. Liquid assets also provide a safety cushion, allowing you to cover financial emergencies without having to take on high-interest debt.
On the other hand, liquid assets generally don’t grow as fast as non-liquid assets. This means they’re more susceptible to inflation, which can erode your purchasing power over time. That’s why both liquid and non-liquid assets are components of a balanced portfolio.
Frequently asked questions (FAQs)
Is a home a liquid asset?
Generally, a home isn’t considered a liquid asset. A liquid asset can quickly be converted to cash, which isn’t always the case for a home. For example, say you had an emergency and needed cash within a few days. It’s unlikely you could sell your house and be ready to spend the proceeds within that time frame.
What is a liquid account?
A liquid account is an account that gives you easy access to cash. For example, a checking account is a highly liquid account. You can use your debit card, write a check, or transfer money out of your account for direct access to your money. You can also visit an ATM or bank branch to withdraw cash. Savings accounts, CDs, and money market accounts are also relatively liquid.
Are 401(k)s considered liquid assets?
A 401(k) isn’t generally considered a liquid asset unless you’ve reached the age of 59 ?. That’s because making a withdrawal prior to this age can trigger an additional 10% tax on the distribution. However, when you turn 59 ?, you don’t have to pay penalties for making withdrawals, and your 401(k) becomes more liquid.
Is a Roth IRA considered a liquid asset?
Roth IRAs are more liquid than other retirement accounts because you can withdraw your principal contributions at any time without paying taxes or penalties. However, Roth IRAs aren’t as liquid as other account types, such as savings and checking accounts. You generally can’t withdraw your Roth IRA earnings until age 59 ? without paying penalties and potential taxes — though there are some exceptions, like withdrawals made to buy your first home.
