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Just as liquids can flow and move with ease, liquid assets are assets that you can quickly and easily access. They can be cash or anything of value that you can quickly turn into cash without paying heavy penalties or fees.
Having liquid assets can be a lifesaver in an emergency. Indeed, an emergency savings fund is an example of a liquid account you can use at a moment's notice. You may also want to have liquid assets available to take advantage of limited-time opportunities.
What Is the Difference Between Liquid and Non-Liquid Assets?
The difference between liquid and non-liquid assets is how easy—or difficult—it is to convert the asset into cash without paying steep penalties or fees. Some types of assets fit into the liquid or non-liquid asset category depending on the circumstances, while others are more squarely set in one category.
Examples of liquid assets include:
- Cash: This is money on hand that you can use as you please.
- Money in a checking, savings or money market account: While there may be some restrictions on withdrawals from savings and money market accounts, it's usually easy to access these funds.
- A certificate of deposit (CD): You may have to pay a small penalty if you take money out of a CD before it matures, but you can typically still quickly withdraw the money in an emergency.
- Some types of investments: If you have stocks, bonds, mutual funds, exchange-traded funds (ETFs) or other securities, you may be able to easily sell these investments for cash. However, these investments fall into a middle ground because the value of your assets may decrease during market downturns, which could coincide with you needing access to cash.
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Non-liquid (or illiquid) assets tend to be physical possessions that can take time and money to turn into cash, though securities are sometimes considered non-liquid as well. Examples include:
- Real estate: Homes, commercial property and land are common non-liquid assets.
- Vehicles: A vehicle may be easier to sell than property, but it can still take time. Less-common vehicles, such as boats and RVs, can be particularly tricky to quickly sell for a reasonable price.
- Jewelry and collectibles: It may be easier than ever to connect with buyers online, but the potential time and fees involved still make collectibles a non-liquid asset.
- Funds in tax-advantaged accounts: You may have cash or investments in your tax-advantage accounts, such as 401(k)s, 403(b)s, 529s and IRAs. While it's not necessarily difficult to access the money, withdrawing funds can lead to steep penalties. This is another "it depends" area, however: If you qualify for penalty-free withdrawals from the account, you might view the funds as liquid assets.
Are Liquid Assets Important?
Liquid assets can be very important as they limit your costs and increase your options if you have to quickly react to a situation.
This could be a crisis, such as a job loss or visit to the emergency room. If you have liquid assets available, you can more easily cover your expenses while you look for work or recover. With medical bills, you can sometimes get a discount if you offer to pay for the procedures when you receive the service or make a full (but discounted) payment when the bill arrives.
If you don't have liquid assets, you may have to borrow money by taking out a loan or using a credit card and then paying off the expense, plus interest, over time. Or you might have to cash out non-liquid assets for less than their worth, or pay a penalty and lose the potential long-term growth of those assets.
Liquid assets can also help you take advantage of opportunities when they arise. Perhaps you're semi-seriously looking at buying a house when you see a new listing at an unbelievable price—the seller's lack of liquid assets is leading them to sell the home for less than it's worth.
You'll need liquid assets for the down payment, and a larger down payment can help you get approved for a mortgage, lead to lower mortgage rates and help you avoid the additional cost of private mortgage insurance. In short, the more liquid assets you have available for a down payment, the better.
Start Building Liquid Assets
Building liquid assets is no different from building your savings. Often, this starts with cutting your expenses, increasing your income and saving (rather than spending) the difference. Tracking your finances with a budget can be important as you monitor your progress and find new savings opportunities.
Additionally, you may want to monitor your credit report, which you can do for free with Experian. In case you need to borrow money, having good credit could be the difference between getting approved and denied.