Assets are any type of resource that has value and may be converted into currency. There are two sorts of assets: liquid assets, which are easily available to meet financial responsibilities, and non-liquid assets, which take longer to convert into useful money but usually gain more over time.
A consistent source of liquid assets is essential for any individual or business, thus it is critical to understand what types of assets are liquid and how to use them to better grasp the nature of your company’s financial portfolio as well as your own finances.
This article defines liquid assets, explains why they are important, and provides examples of both liquid and non-liquid assets.
Liquid assets are personal property that can be changed into cash in a short amount of time. Liquid assets are typically valued as cash since they can be easily converted into money if necessary.
When an asset is not cash, a number of criteria determine whether it is liquid. Liquid assets may usually be converted to cash rapidly since they are part of a market with consistent demand and volume.
Furthermore, the transaction to convert the asset to cash must be secure. It is also worth noting that a liquid asset preserves its value during the transaction, which means it is valued the same before and after the transaction.
For an asset to be considered truly liquid, there are several boxes to tick:
- A liquid asset must exist or be traded in an existing, established market. That means that there are buyers and sellers and the asset is always (or nearly always) in demand at some price. When there’s always a buyer, the asset is easy to sell or trade, making it more liquid.
- A liquid asset can be converted to cash quickly. The more difficult or time consuming it is to sell an asset, the less liquid the asset is — otherwise known as illiquid. Collins says an illiquid asset is something that requires at least some leg work to exchange for cash: “An illiquid asset would be anything I need to find a buyer for. Something that there’s not a buyer readily available for.”
- The process of selling or trading the asset also needs to be both secure and simple for it to be truly liquid. Think about the cash you may have in a bank account, for example. The cash in it is considered a liquid asset because the process of getting it out is as easy as a trip to the ATM. And because banks are liable for safely securing your funds, they’re also protected. The same goes for other assets like stocks or exchange-traded funds: Stocks can be easily traded or sold for cash since there’s always an interested buyer.
Finally, the vast majority of liquid assets also are the type most commonly owned by investors. That is, they’re things like stocks or other easily sold securities such as US Treasury bonds. Cash, of course, also fits the bill, as it can be used by anyone at any time.
Liquid assets examples
Assets come in a variety of types and are spread across a spectrum of liquidity. Even among certain asset types, liquidity can vary — some real estate assets may be more liquid than others, for example.
Here are some of the types of liquid assets:
- Cash, and cash equivalents: It doesn’t get much more liquid than cash. It can be used to purchase just about anything, and doesn’t require a transaction to “liquify.” Cash equivalents, such as CDs, are in the same bucket, although there may be a fee to pay when liquify ing this type of asset.
- US Treasury bills and bonds: Treasuries are bonds issued by the US government. They are among the most liquid types of bonds, as there are always buyers in the market.
- Stocks: As we mentioned before, stocks are liquid in that they can easily and almost always be purchased or sold for cash at a moment’s notice. It may take some time for cash to hit your account, of course, and you may take a loss on the sale. But the speed and ease with which stocks can be liquidated is what earns them a spot on the list.
- Bonds: Much like stocks and other securities, bonds can be sold at any time for cash so long as the markets are open.
- Mutual funds: While not quite as liquid as other securities as they only trade at the market close, mutual funds can be liquidated for cash rather fast and easily.
- ETFs: Perhaps best described as baskets of investments — like a bundle of stocks — ETFs trade on exchanges like other securities. Since they trade easily, they are likewise fairly liquid.
- Foreign currency: Foreign currencies are cash, and as such, are highly liquid. You would need to exchange a foreign currency for US dollars, which may require an extra step, but in terms of liquidity, foreign currencies are among the most liquid assets you can own.
- Precious metals: Gold, silver, platinum — precious metals are fairly liquid, as they’re easy to sell for cash. It might require a trip to a local coin shop to access the “market,” but in terms of liquidity, precious metals tend to tick the boxes.
Examples of illiquid assets
Conversely, illiquid assets are those that cannot be easily converted to cash. They may take a while to sell or lack a bustling market full of potential buyers. The point is, it’ll be tough to turn these types of assets into fast cash:
- Real estate: Real estate may hold a lot of value, but it is neither fast nor easy to sell. On average, it takes around two months to sell a house in the US, making real estate an illiquid asset.
- Collectibles: Collectibles can be almost anything, from baseball cards to paintings. While these assets may hold value, it can be difficult to find buyers, depending on the specific market, and their values may be hard to assess. For that reason, collectibles are considered illiquid.
- Stock options: Like other items on this list, stock options may be valuable, but aren’t easy to transfer or squeeze cash out of.
- Private equity: Do you own a share of a business or organization? This is also called “equity,” and while it may be of some value, that value isn’t easy to tap into.
- Intangible assets: It’s hard to define intangible assets since they’re, well, intangible. But they may include things like intellectual property. These would be illiquid, given their specific nature, and a lack of an immediate marketplace where they can be exchanged for cash.
Liquid assets give their owners quick and easy access to cash. They can quickly be sold, granting access to their cash value, in contrast to illiquid assets, which may take more time and effort to sell or trade. Generally, you should keep a portion of your overall assets as liquid assets, in case you need to get your hands on some cash.
Why is it Important to Maintain Liquid Assets?
Liquid assets are usually the first source of funds to meet payment obligations. It is important to know what assets are liquid and how much of your financial portfolio should stay liquid. Keeping the right amount of liquid assets can help in two main situations:
In case of emergency
Having liquid assets could become especially important in a time of emergency or financial hardship. Generally, it is challenging to plan for an emergency. Liquid assets allow you to have funds ready to meet your or your company’s ongoing financial obligations.
Mortgage applications
When creditors view your ability to repay a loan, they will consider the number of liquid assets you have. It is to their benefit to extend loans to people who can make payments on those loans, even in times of financial hardship.
Read Also: Measuring and Improving Working Capital Efficiency: Practical Tips for Business Owners
Liquid assets provide your business with money when it’s quickly needed. Rapid access to your funds helps you cover areas such as employee wages, supplier invoices, insurance payments, and any ongoing bills.
Liquid assets are also an invaluable safety buffer. The ability to access quick cash in the event of an unexpected bill is a relief for most businesses. Having a reserve of available assets serves as an emergency parachute, and can quite literally save your business in some cases.
You’ll remain better prepared for flexible operations the more you have in liquid assets.
Non-liquid assets certainly have their own benefits and are usually necessary for your business to build long-term wealth. But liquid assets are more critical to running an agile business.
Additionally, liquid assets are more helpful when applying for loans. Having liquid assets proves that you have more cash available, which qualifies you as a safer candidate to receive a loan. More liquid assets might even help you access competitive interest rates and better loan terms. This is crucial for startups and new businesses.
Several commonly held assets are considered liquid. Here are some examples:
- Savings accounts
These are bank accounts that typically limit the number of daily or monthly withdrawals the owner can make. Their primary purpose is to allow the account owner to earn a low, consistent interest rate while maintaining cash in the bank.
- Checking accounts
Like savings accounts, these bank accounts may or may not earn interest and allow the owner to draw on them regularly.
- Money market accounts
These accounts are also held in banks and function as special savings accounts. The owner cannot withdraw money by check, debit card, bank draft, or electronic transfer more than six times per month. Transactions by ATM, in person, by mail, messenger, or telephone do not count against the limit. These accounts typically earn more interest than regular savings accounts.
- Stocks
Stocks are a unit of ownership in a company. They are considered liquid assets because they are easily traded within their stock exchange and can be sold for cash on demand.
- Bonds
Bonds are investment securities issued by corporations, governments or agencies. They earn specified payments over the life of the bond and pay the holder a lump sum on maturity. They are considered liquid because they are easily traded or sold for cash on a bond market.
Liquid assets vs. non-liquid Assets
While a well-managed financial portfolio should have enough liquid assets to cover basic demands and commitments in the event of an emergency or to demonstrate the owner’s creditworthiness, liquid assets other than stocks and bonds do not necessarily increase in value significantly.
It is also critical to recognize and manage the value of non-liquid assets, which often increase significantly over time. Non-liquid assets are those that cannot be quickly converted to cash and may lose value in the process. Examples of non-liquid assets are:
- Land and real estate
This refers to land you own and everything permanently attached to the land, such as a home or business. It also includes the right to use, lease and resell the land. This is considered a non-liquid asset because selling the land or finding a tenant could take time. Also, the ease of doing those things may be limited by the need to meet other financial obligations, such as paying off a mortgage. Additionally, the sale may provide a lower value than the initial cost of the land.
- Antiques
Antiques are not considered liquid assets because their resale may take time and the resale market is not consistent. Additionally, the sale may provide a lower value than the cost of the item.
- Tax-free retirement accounts
Tax-free retirement accounts are not considered liquid because there are often penalties for withdrawing funds as cash. Those penalties may also diminish the value of the funds, resulting in the holder obtaining less money than they would have if they had waited to withdraw it.
- Designated college savings accounts
College savings accounts are non-liquid for much the same reason that retirement accounts are non-liquid. There are steep penalties for withdrawing cash, and the transaction of withdrawal could cause the fund to lose value.
- Vehicles
Vehicles are non-liquid assets because it can take quite some time to sell them, and it is possible that the sale would yield a lower amount than the appraised value of the item.
- Certificates of deposit
Certificates of deposit pay the holder their investment plus a predetermined amount of interest. These securities are non-liquid assets because they lose value when the cash value is redeemed before maturity.
What are the Characteristics of a Liquid Asset?
Liquidity is the ability of an asset to be turned into cash quickly and without losing value. Therefore, the greater the liquidity, the faster an asset can be converted into cash without affecting its value.
On the contrary, the less liquidity, the longer the delay and/or more loss of value an asset has to be converted into cash. For example, the shares of a company are liquid assets because they can be sold quickly at a suitable value.
On the other hand, a house is an asset with little liquidity (illiquid) since its process and closing of sale are much greater. Rarely can a property be sold quickly at a good price. And those who want a quick sale must usually do so at the sacrifice of a significant percentage of their value.
Liquidity is the level of accessibility to your investment and determines how long it will take you to be able to dispose of these resources. The conversion process differs from asset to asset. For example, in the case of a retirement fund, you will need the necessary paperwork to liquidate the funds, which can take some time.
Irrespective of your investment, you must have a portion of your money available for instant access. In this way, thanks to the conversion costs, you can keep the value of your funds intact. Any cash you have is reserved for emergencies and needs to be replenished immediately. While there is no magic formula to calculate how much to have, it is suggested to have at least three months of our take-home pay in cash.
The following are the common characteristics of liquid assets:
- Readily Convertible: Liquid assets can be quickly and easily converted into cash without significant loss of value.
- High Market Demand: They have a robust market demand, making selling them at or near their market price simple.
- Low Price Fluctuation: Liquid assets typically experience minimal price fluctuations in the short term.
- Widely Accepted: They are widely accepted as a means of payment or exchange in financial transactions.
- Minimal Transaction Costs: Transaction costs associated with buying or selling liquid assets are usually low.
- High Marketability: Liquid assets are highly marketable, meaning they can be sold swiftly without much effort.
- Frequently Traded: These assets are actively traded in financial markets regularly.
- Stable Value: They maintain their value reasonably well over time, ensuring reliability.
- Easily Accessible: Investors can access liquid assets quickly whenever needed.
Overall, the characteristics of liquid assets make them an important part of an individual’s financial portfolio or a business’s balance sheet. They offer quick access to cash, stability, and safety, making them essential to financial planning and management.