Liquidity is a measure of how easily something can be transformed into cash. The faster an asset may be converted to pure cash without affecting its actual worth (or with as little damage as possible), the more liquid it is.

For example, cash is the most liquid asset. That is because cash is already cash, therefore there is no need to convert it, and its value remains unchanged. On the other end of the range, a plot of land is considered a nonliquid asset. Converting real estate into cash takes months and can be costly. When converting land to cash, you constantly risk losing value.

Liquid assets refer to any assets that can be readily converted to cash without losing any or much of the market value. Considerations that help determine whether an asset may be liquid include:

• How fast you can convert it to cash. One of the top factors in whether an asset is liquid or not is how long it takes you to convert it into cash on hand. This usually means how long it takes for you to sell the asset. A stock or bond you can trade on the market in minutes is pretty liquid. A piece of fine art in your collection that requires displaying in a gallery and finding the right buyer is a lot less liquid.
• How easy it is to convert it to cash. Even if you can quickly sell an asset, you may need to pay fees or incur other costs to do so. You might, for example, have to pay to advertise the asset or seek out the right buyer for it. A piece of specialized factory equipment might only sell to a business doing similar work in your niche. Or, in the case of a classic car, you might incur restoration or maintenance costs to make the car more attractive to buyers. The more you have to do or spend to convert an asset to cash, the less liquid it may be.
   
• The size and stability of the specific market. In some cases, the market itself has an impact on whether an asset is more or less liquid. For instance, a car may not be a liquid asset in most cases. But if you have a really rare collector’s car in good condition and are in a car collecting community (or market) where numerous people have offered to buy the vehicle at whatever asking price, the market may have created a temporary condition where the car would act as a liquid asset for you.
• Whether there are legal requirements or tape involved. Assets that are bound by documents and legal requirements may generally be less liquid than assets that aren’t. Anytime there’s a waiting period or someone aside from the buyer and seller must approve a purchase, there’s a chance the deal will fall through or cost you money, so those aren’t usually liquid assets. For example, to sell an actual business, you typically go through a multi-step process that involves marketing it, valuation and due diligence, and negotiations with the buyer. Businesses are definitely not liquid assets.

What are the Benefits of Liquid Assets?

You’ve probably heard that diversification is essential for every investing portfolio. That is also true for finances in general. Holding only one sort of asset can make your financial situation imbalanced and expose you to hazards when the economy swings up and down. Having a healthy balance of liquid and nonliquid assets is simply one technique to achieve the necessary diversification in corporate or personal finances.

Here are some advantages that liquid assets can provide for your savings portfolio or day-to-day financial life:

• Fast access to cash when you need it. When you have liquid assets in your portfolio, you can easily access the cash you might need for emergencies or other large purchases. For an individual, liquid assets make it easier to pay a sudden medical bill or let you grab that stellar international vacation deal when you see it. Businesses with liquid assets can use them to invest in growth opportunities, replace broken equipment, or scale up by hiring employees — without having to seek out loans or investors.  
• A more favorable view of your portfolio. Of course, if you do need loans or investors, having liquidity in your portfolio can help. It’s an ironic truth that it’s easier to get funding or a loan when you already have cash on hand (or assets that could readily convert to cash). That’s because liquidity demonstrates your ability to manage and safeguard assets, which makes lenders and investors more confident that you’ll be able to repay them or create earnings for them in the future. 
• More flexible investment ability. While it’s good to have liquid assets in your portfolio, you don’t have to keep all your liquid assets the same forever. One major pro of liquidity is that you have the flexibility to make investment changes, and you can easily use some of your liquid assets to fund another type of purchase. For example, you can sell one type of stock to buy another in order to diversify your portfolio. You could also use cash on hand to buy nonliquid assets, such as property or equipment for your business if you come across a great deal. Converting liquid assets for this purpose lets you make large purchases without debt, which in turn lets you save on interest and other costs.
• Potentially reduced risk. In general, liquid assets tend to come with fewer risks than nonliquid assets. Carrying at least some liquid assets in your portfolio means you always have access to a certain amount of cash value, even if markets change and the value of nonliquid assets drops substantially.

It’s important to note here that nonliquid assets have their own set of benefits, so you shouldn’t ignore them in favor of only cash and cash-like assets. For example, real estate is about as far from liquid as you can get, but it still has a valuable role in investments and retirement savings. 

Examples of Liquid Assets include:

• Cash: Cash in hand or bank accounts, as it can be used for immediate transactions or payments.
• Marketable securities: These include stocks, bonds, and mutual funds that can be quickly sold on the open market.
• Treasury bills and certificates of deposit: These are short-term debt securities issued by the government or financial institutions that offer fixed interest rates and can be sold before maturity.
• Money market instruments: Instruments like commercial paper, treasury bills, and certificates of deposit with maturities of fewer than 12 months.
• Accounts receivable: These are amounts owed to a business or individual by customers or clients, which can be converted into cash by selling the receivables to third-party collection agencies or through factoring.

What are the Top Liquid Assets?

Let’s dig into some liquid assets examples to better understand how you can support liquidity for yourself, your family, or your business.  

Cash

Physical cash — as in the bills you might have in your wallet or petty cash safe right now — is a liquid asset. Hard cash is the most liquid asset you can have because it requires no effort to convert it into a form that lets you invest in or buy things. You simply pull it out and hand it over. There’s also no question about the value — a $20 bill is a $20 bill, regardless of external factors. (Note that value isn’t the same thing as purchasing power, and obviously, in different markets, a $20 value buys you more or less.)

Read Also: Top 5 Liquid Assets Every Investor Should Know About

Cash-on-hand doesn’t just refer to the physical bills in your pocket. It also refers to the amounts you have in savings or checking accounts. You can easily withdraw that cash or use a check or debit card to spend it as you would the bills in your pocket.

Cash alternatives

Cash alternatives are generally slightly less liquid than actual cash because it may take a little more time to convert them, or you may lose a small percentage of value in doing so, often due to fees. However, these assets present a low risk for value loss and are typically fairly easy to convert. Examples of cash equivalents include:

• Treasury bills and notes. Treasury bills are backed by the U.S. government and are lower-risk investments with short maturity dates — they usually mature in a year or less. Treasury notes have maturity dates between a few years and 10 years.
• Certificates of deposit. Certificates of deposit are also lower-risk investments, and you can choose maturity terms as low as 3 months.
• Money market funds. Money market funds trade mostly in assets that have high liquidity, including cash, cash equivalents, and commercial paper.
• Commercial paper. These are ways corporations can borrow money to make short-term obligations. They pay the funds back with interest, and that interest is divided among the people holding the commercial paper investments. 

Marketable securities

Some, but not all, marketable securities are considered liquid assets. If you can easily and quickly convert the security into cash, it may be considered liquid. Businesses must also consider how the asset must be listed on balance sheets. If you hold securities that you’re required to list on balance sheets as long-term assets, you wouldn’t normally consider those to be liquid assets.

Here’s a quick look at some marketable securities that might be considered liquid assets:

• Stocks. You can sell stocks quickly via electronic markets, often converting them to funds the same or next day. However, how liquid a stock is depends on several factors, including whether there’s a market for it and how much people are willing to pay.
• Bonds. Bonds with shorter terms can be considered liquid assets. 
• Index funds. Index funds and other marketable securities can also be liquid assets, with the same caveats that apply to stocks and bonds. 

Accounts receivable

If people owe you money and you have a reasonable expectation that you can collect those funds, the debt may be a liquid asset for you. For a business, this comes in the form of accounts receivable. If you have $10,000 in invoices that are less than 30 days old and you run on a 30-day net structure, you might consider that you have $10,000 in liquid assets, as those invoices should be paid soon.

Another way to convert accounts receivable to cash is to factor your invoices. This involves selling them to a lender who gives you a certain percentage on the dollar for the outstanding invoices. When the invoices are paid, the factoring company keeps the remaining percent as a fee for the loan.

Inventory

In a healthy business, inventory is considered a liquid asset because you convert these goods to cash as you sell them (or use them in products you sell). How liquid inventory actually is depends on the market and how fast a business is selling its products. If things are slow or you’ve accidentally overbought supplies, your inventory assets may be less liquid.

Tax refunds

People or businesses that have a tax refund coming may be able to treat it as a cash asset. Some lenders are willing to use tax refunds as collateral for credit, providing you with cash immediately in exchange for receiving your tax refund when it arrives. 

How to Build a Strong Liquid Asset Portfolio

A strong liquid asset portfolio is a valuable tool for both individuals and corporations, particularly during times of uncertainty. The capacity to quickly turn assets into cash can help you weather financial storms and take advantage of investing opportunities. But what exactly is a liquid asset portfolio, and how can you create one that is robust and resilient?

First, it’s critical to understand what kinds of assets are deemed liquid. Cash, savings accounts, money market accounts, and short-term government bonds are all types of liquid assets. Stocks and other investments can also be deemed liquid, albeit they may take longer to convert to cash and are susceptible to market volatility.

To build a strong liquid asset portfolio, consider the following strategies:

1. Determine your liquidity needs: Identify how much cash you need on hand for emergencies, how much you need for short-term expenses, and how much you can afford to invest in longer-term assets. This will help you determine how much of your portfolio should be allocated to liquid assets.

2. Diversify your holdings: Don’t put all of your eggs in one basket. Spread your liquid assets across different types of accounts and investments to minimize risk and maximize liquidity.

3. Consider inflation: While cash and short-term bonds are highly liquid, they may not provide sufficient returns to keep up with inflation. Consider investing in longer-term bonds or other assets that can provide higher yields.

4. Stay informed: Keep tabs on market trends and economic indicators that could impact your liquid asset portfolio. For example, if interest rates are rising, you may want to consider investing in short-term bonds that will benefit from higher yields.

5. Rebalance regularly: Over time, your portfolio may become unbalanced as certain assets perform better than others. Regularly rebalancing your portfolio can help you maintain the right mix of liquid assets to meet your needs.

By following these strategies, you can build a strong liquid asset portfolio that provides the flexibility and stability you need to navigate uncertain times. For example, if you unexpectedly lose your job, having a reserve of liquid assets can help you cover your expenses until you find a new source of income. Alternatively, if a promising investment opportunity arises, having the cash on hand to take advantage of it can help you generate significant returns. Whatever your financial goals may be, a liquid asset portfolio is an essential tool for success.

Strategies for Building a Liquid Asset Portfolio

One of the most important components of financial planning is developing a liquid asset portfolio. Liquid assets are those that can be easily turned into cash with little loss of value. These assets are critical for paying immediate financial obligations, such as emergency spending or unexpected debts.

In this section, we will go over several ideas for creating a liquid asset portfolio that will help you stay financially secure and reach your financial objectives.

1. Set a Savings Goal: The first step in building a liquid asset portfolio is to set a savings goal. Determine how much money you need to save each month to achieve your financial goals. This could include an emergency fund, a down payment for a home, or retirement savings. Having a specific goal in mind can help you stay motivated and on track.

2. Create a Budget: To achieve your savings goal, you need to create a budget. A budget is a plan for how you will spend your money each month. It helps you identify areas where you can cut back on expenses and save more money. By sticking to a budget, you can free up more money to put towards your liquid asset portfolio.

3. Prioritize High-Yield Savings accounts: When building a liquid asset portfolio, it’s important to prioritize high-yield savings accounts. These accounts offer higher interest rates than traditional savings accounts, which means your money will grow faster. Look for accounts that offer no fees and no minimum balances.

4. Consider Certificates of Deposit (CDs): Certificates of Deposit (CDs) are another option for building a liquid asset portfolio. CDs offer higher interest rates than savings accounts, but your money is locked up for a specific period of time. If you need to access your money before the CD matures, you may face penalties.

5. Invest in Money Market Accounts: Money market accounts are another option for building a liquid asset portfolio. These accounts offer higher interest rates than traditional savings accounts, but they often require a higher minimum balance. Money market accounts also come with check-writing privileges, which can be convenient for accessing your funds.

6. Diversify Your Portfolio: Finally, it’s important to diversify your liquid asset portfolio. This means spreading your money across different types of accounts and investments. By diversifying, you can reduce your risk and maximize your returns. Consider a mix of high-yield savings accounts, CDs, and money market accounts to achieve a well-diversified portfolio.

Building a liquid asset portfolio is essential for achieving financial security and meeting immediate financial needs. By setting a savings goal, creating a budget, prioritizing high-yield savings accounts, considering CDs and money market accounts, and diversifying your portfolio, you can build a strong and secure liquid asset portfolio. Keep in mind that each person’s financial situation is unique, and it’s important to consider your own needs and goals when building your portfolio.