Liquid asset refers to anything that you possess that can be easily converted into cash when you need it. You can find different types of liquids assets like certain investments, cash, and savings accounts. The sum of all these assets, liquid or not, minus the liabilities will be your net worth. Besides your net worth, you also need to be aware of the value of the different types of liquid assets you own. This will help you understand the amount of cash you can readily access if you face a financial crisis.
While investments like mutual funds, stocks, bonds, and market funds are considered to be different types of liquid assets, real estate, on the other hand, cannot be regarded as liquid simply because selling property can be a time-consuming process and you are not guaranteed to get the market value in return on selling it.
What is liquidity and why is it important
The liquidity of assets is vital for financial emergencies. For instance, if you fall in troubled times and you do not have enough time to try and sell your house, you will need to be able to access funds fast. This is imperative in order to make sure you do not run into debts and you can afford to pay for the basic living costs. In dire financial situations, your net worth will not really matter. What really matters is if you have access to funds immediately to help you tide over the crisis. Having enough liquid assets is important to maintain a healthy financial profile. Since it is not possible to predict hardships resulting from some sudden illness or loss of employment, it is always better to have cash ready; this will give you much-needed peace of mind.
How can assets be classified
Based on convertibility into cash, your assets can be either current or fixed. Current assets may be converted into cash readily, and these are liquid assets like cash, stocks, marketable securities, cash equivalents, and short-term deposits. Fixed assets are land, buildings, equipment and machinery, and patents and trademarks that are long-term and hard assets. These cannot be converted into cash or cash equivalents easily.
Types of liquid assets:
Key types of liquid assets are:
- Cash in hand
- Money in bank
- Accrued income
- Government bonds
- Promissory notes
- Marketable securities
- Accounts receivable
- Cash equivalents
- Tax refunds
- Certificates of deposit
The stock market, for instance, is a type of liquid market as you will find a rather large number of sellers and buyers. Securities may be sold via electronic markets at market prices, and in this sense, these are also liquid assets.
Cash on hand can be regarded as a liquid asset as it may be accessed quickly; any company can use this to resolve current financial liabilities. For example, a person or a business will have a savings account; you can take this out to settle any liabilities that you may have at the moment.
Investments are liquid assets since they can be liquidated easily. Mutual funds, bonds, money market funds, and stock shares are therefore considered liquid. All of these can be converted into cash readily whenever there is a financial emergency.