Liquid assets are things you own that can be quickly converted into cash without losing value. They’re different from fixed assets, which are good investments but take longer to convert to cash. Think of things like real estate properties (your home, for example) or your car. Liquid assets come in many different forms. Make sure you consider which ones you have and how much you should have at the ready.
Knowing the total value of your liquid assets can be especially helpful case you’re struggling to pay for something in a sudden pinch. Say you lost your job, wound up in the hospital or had your car break down. Would you have enough cash on hand in the case of an emergency?
What Assets are Liquid?
Think about what assets you have within easy access that, if needed, could pay for something within a relatively short amount of time. Some examples of these liquid assets are cash, checking accounts, savings accounts and some investment funds.
Cash and Cash-Like Accounts
Cash is your most liquid asset because you don’t need to take further steps to convert it – it’s already cash. You can use it to pay for a good or service immediately and also use it to settle any outstanding debts.
Cash is usually held in checking accounts, savings accounts or money market accounts. You can withdraw money from them quickly in order to pay for debts or other liabilities. Other funds, like a trust fund, tax refund, court settlement and some certificates of deposit (CDs) are included within the designation of cash-like accounts. Even though they are not cash, they can be relatively easy to convert into cash so that you can go through with a transaction as quickly as possible. In the case of a CD, note that it depends on the rules of the account; in many cases, there is a punishment for withdrawing your money before the term has elapsed.
Taxable Investment Accounts
If you have a variety of different investment accounts, you can liquidate them and convert them into cash a little less quickly than some of the accounts mentioned above, but still within a reasonable amount of time. Investment accounts can turn into cash within a couple weeks or months, and therefore are considered liquid assets. Investment accounts can contain a variety of securities, including:
- Money market funds
- Mutual funds and other types of stock market investments
While investment accounts are liquid, you shouldn’t rely on them in the same way that you rely on your cash accounts. That’s because investments in securities involve a risk of loss of principal, meaning that some of the money you invest can be lost if the market goes down. You can liquidate your investments, but you may not get as much cash as you put in.
Generally speaking, only taxable investment accounts are considered truly liquid. That’s in contrast to tax-advantaged retirement accounts, which vary in liquidity but generally limit your ability to liquidate your assets. IRA plans cannot be considered liquid if you haven’t reached qualifying retirement age, because you’d still be obliged to pay the IRS early withdrawal penalties. But you can claim a hardship withdrawal if your situation warrants a waiver of the 10% penalty for an early withdrawal.
How to Build Your Liquid Assets
Building your liquid assets essentially means that you’re giving yourself a financial insurance plan. In the case of an emergency, you’ll have money on hand to cover yourself and/or your loved ones through any major or unexpected incidents.
Take a look at your assets and rank them in order of liquidity. If you don’t have any cash to cover an emergency, start with that: an emergency fund. Add to this as much as you possibly can. A comfortable amount would be enough to cover your basic needs and expenses for three to six months if you lost your job today. And that amount, of course, is not the same for everyone. It varies based on factors such as your specific monthly expenses, family and living situation.
An emergency fund may be the easiest way to start building liquid assets, but there are other ways, too. You can try a hands-off robo-advisor or use a variety of tools – from mobile banking apps to investment apps – that don’t require more than a couple dollars to get started. You can also use a budgeting calculator to do some short-term planning and an investment calculator to get a sense of how your assets could grow over time.
Making sure you have plenty in cash and other liquid assets is crucial – not just to cover everyday expenses, but also to allow you to handle an emergency or big life change. Understanding which of your assets are more liquid than others will save you time – as well as potential obstacles – in the long run.
For instance, when you apply for a mortgage, lenders can look at the amount of liquid assets you have. They do this to ensure that should anything happen – like a job loss or other financial emergency – you’d still be able to continue making monthly mortgage payments. Lenders may also evaluate you in the same way when you apply for a car loan.
Tips for Managing Financial Success
- Have a foundation to build on. Once you’ve got a solid emergency fund, work on investing for your future. Set up your employer-sponsored 401(k) and take advantage of the company match, if there is one. Open and actively contribute to an IRA. Once you’re on track in case of an emergency, the investment opportunities are endless.
- Get some expert advice. Talk to your financial advisor about different investment opportunities that match your style and preference. Don’t have an advisor yet? Finding the right one doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.
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