When it comes to assets and investments you’ve probably asked yourself what is a liquid asset? A liquid asset is one that can be easily converted to cash if needed. These assets are readily available and are an important part of building wealth.
Since liquid assets are the most common form, chances are you already have several different types. This guide will go over what a liquid asset is, the different types and what they mean for your portfolio.
What is a Liquid Asset?
A liquid investments is an asset that can be easily converted to cash. This makes the asset similar to cash in that it can be sold without a big impact on the value of the assets. In short, liquid assets are viewed almost the same way as cash.
There are several factors that make an asset liquid. First, the asset must be in an established market where there are a lot of buyers interested. The transfer of ownership must also be an easy process. Liquid assets are among the most used by businesses and consumers.
Cash is technically considered to be a liquid asset because it can be accessed readily. Cash can be used to pay for goods or services and settle liabilities due to the fact that it is a legal tender.
Types of Liquid Assets
There are several types of common liquid assets. Chances are you currently have several of these already. In addition to cash, other liquid assets include money in your checking or savings account. U.S. Treasuries and bonds, mutual funds, and money market funds are all considered liquid assets.
A mutual fund is a portfolio of investments where various investors have a variety of securities pooled together, including bonds and even cheap stocks. A mutual fund is a liquid asset because investors are able to sell their shares for cash at any time.
Money market funds work in a similar way. You are able to sell at any point and receive your funds quickly. Liquid assets are crucial for everyday expenses and unexpected emergencies.
What isn’t a Liquid Asset?
In defining what is a liquid asset, it is also important to note the assets that aren’t liquid. A non-liquid asset is one that can take a long period of time to liquidate.
Real estate and land are among the most common non-liquid assets many people have. Real estate is considered a non-liquid asset because it could take anywhere from a few weeks to several months for someone to see the money from their sale.
If someone is trying to sell all of their assets quickly because they are in need of funds, real estate can often take a hit. If you need money quickly, you may be far more likely to sell your real estate for less than it is worth in order to get your funds faster.
Anything you can sell can really be looked at as an asset. If there’s a market for someone to buy it, you can look at it as an asset. Art, collectibles, and cars can all be considered a non-liquid asset.
For more information on assets and money, check out the finance section for helpful personal finance tips.