Liquid assets are any assets that can be easily and immediately converted into cash. In fact, you can think of any liquid asset as actual cash, because the process for making it “liquid” (or cash) should be practically effortless. What are examples of liquid assets? Well, cash, for one. That can always be found in your checking or savings account, or a money market account. You can withdrawal this asset at a moment’s notice in order to settle debt and other liabilities.
What Are Cash Equivalents and Are They Considered Liquid?
Cash equivalents can be converted to cash in a short amount of waiting time (for example, 90 days). They are still considered liquid even though they take a bit longer to liquify.
Some examples of cash equivalents:
• Stocks. These are often considered liquid assets because they can be converted into cash when you sell them. Keep in mind, though that the most liquid stocks might be the ones that everybody wants to buy and sell. You may have a more difficult time liquidating stocks that nobody wants.
• U.S. Treasuries and Bonds. These products are relatively easy to buy and sell, and are usually done so in high volume. They have a wide range of maturity dates, which allow you to figure out when you want to liquidate them. Because they’re often considered safe and dependable, the interest rates are somewhat lower and could be great for investors who are looking to mitigate risk. U.S. Treasuries are usually exempt from state and local taxes, but not federal taxes.
• Mutual Funds. Here, various investments types can be managed in a portfolio or a fund, and investors are able to buy shares of the overall portfolio (hence the name “mutual”).
It’s not the same as purchasing one share of specific stock. A fund manager takes care of this fund in the best interests of all the investors. Open-end mutual funds are considered more liquid because the fund generally stands ready to buy back shares on any given day. Closed-end mutual funds, on the other hand, are less liquid than open-end funds because it can be hard to find a buyer for the shares on the open market.
• Money Market Funds. This is a type of mutual fund that invests in short-term debt. It’s considered low-risk and offers low yields, and therefore thought of as relatively safe. You can cash in your chips at any time, making money-market funds a liquid investment.
If you have money in a certificate of deposit (CD), this would be considered “sort of liquid.” You can certainly withdrawal the money if you need it, but if you’re doing so before the maturity date, you’ll more than likely pay a penalty .
Liquid Assets in Business
If you’re running a business, accounts receivable (money you’re owed from clients) are often considered to be a liquid asset, because you can typically expect to be paid within one year of the billing (hopefully sooner).
Any inventory you have on hand (office furniture, a product you’re selling) can also be considered liquid, because you could sell them for cash if need be. The liquid assets on your company balance sheet usually list cash first, then all the other assets that are considered liquid are included next, in order of liquidity.
When businesses need a crystal ball to see how cash liquid they are, they often look to the amount of their net liquid assets. When all current debts and liabilities are paid off, whatever remains is considered liquid.
Usually, this is calculated in a hypothetical context. When you divide all of your current liabilities and debts within one year, the answer you get is considered your “current ratio.” When you divide all of your current assets by current liabilities at the current moment (not for the entire year), you get your “quick ratio” of liquidity.
What Assets Are Considered Non-Liquid?
These are assets that are not so easy to liquidate quickly. For instance, land and real estate investments, which can take a long time to settle up or for the deal to close. You’ll get your money, but most likely, not right away. That’s why assets like these are considered non-liquid.
Land and real estate investments often require negotiation and contracts. Keep in mind that you may not come away with more money than you went in with (this is selling at a loss). Also, inflation is a bear when it comes to getting your money back from land or real estate. That bear can eat away at your money.
Other items that are not considered liquid assets:
• Hobby collections, like stamps and baseball cards
Are Retirement Accounts like IRAs and 401(k)s Liquid Assets?
It depends on what’s in them. For instance, if you put a money market fund into an Individual Retirement Account (IRA), then that would be considered a liquid asset, since money-market funds are considered liquid.
You’ll also most likely pay a penalty if you withdraw the funds before age 59 ½. If you fund your retirement account with real estate assets, then that would not be considered a liquid asset, since real estate is considered non-liquid.
Reasons Why Liquid Assets Matter
Other than the most obvious, which is money that helps you get out of a pinch, liquid assets serve a number of good purposes.
• Net worth: Here’s how to calculate your net worth —subtract your liabilities (your debt) from your assets (what you own, which can include your liquid assets).
• Loan applications: Lenders might look at your liquid assets when you apply for a mortgage, car loan, or home equity loan. If your liquid assets are high, you may get better terms or lower interest rates on your loans. Lenders want to see that, if you were to lose your job or your income, you would be able to continue to pay back the loan using your liquid assets.
Are All Liquid Assets Taxable?
Pretty much. The Internal Revenue Service (IRS) considers taxable income to include gains from stocks and interest gained from bank accounts, among other investments.
Is It Smart To Keep Cashing In Liquid Assets?
It may be worth considering a mix of both liquid and non-liquid assets to help you reach your financial goals.
There is no set formula for every investor’s situation, but beginning investors may want to focus on gathering a few months of liquid assets for the sole purpose of emergencies and unexpected expenses.
How Liquid Are You?
Well, this certainly sucks—four in 10 Americans can’t cover an emergency expense of $400, according to a recent report by the Federal Reserve Board.
Often, people without a lot of loot for emergencies are labeled as “cash poor.” Liquidity is something that people might not think about until they need to.
How to figure out how liquid you are—make a list of all your monthly expenses, from rent/mortgage on down, even your streaming service subscription. Total all your monthly expenses, and compare that sum to the amount of money you have socked away.
Do the two totals work nicely together if you needed those savings to pay for about six to eight months worth of monthly expenses? If so, congrats! If not, you’re not very liquid. Don’t despair, though. There are ways to get more liquid.
Where To Start Building Liquid Assets
For your first step, you might consider saving a nice, comfy cushion of an emergency fund, which should be enough to cover unexpected expenses that might come along.
It’s hard to put a dollar figure on this—it would depend on your life circumstances, and all of us have different ones—but most all of us would need to cover bills, repairs, insurance, job loss, and medical emergencies. If you aim to have several months of emergency money completely liquid, you know what to do—the math.
One good way to build liquidity is to set money aside every week, month, or paycheck. The digital age has made it easier than ever to put automatic deductions in place. Simple savings accounts can be a good place to start the stash—you can always move them into more lucrative liquid investments from there if you want to.
About SoFi Money
SoFi Money® is a cash management account that can hold (or potentially help build) your cash savings. You pay no annual, transactional, overdraft, or other account fees. And with SoFi Money, you can use any ATM in the world—and we’ll reimburse you.
You can sign up for SoFi Money right on your phone. In fact, your phone is your branch, complete with mobile transfers, photo check deposit, and customer service. Your SoFi Money account is FDIC-insured up to $1.5 million, with additional protection against fraud.
Here’s just one example of how liquid SoFi Money can be—you can send your money to anyone, right from our app. And when you send money to fellow SoFi Money holders, they’ll get it right away—no waiting.
SoFi can’t guarantee future financial performance.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
This information isn’t financial advice. Investment decisions should be based on specific financial needs, goals and risk appetite. SoFi and its affiliates do not provide tax or legal advice.
SoFi Money is offered through SoFi Securities LLC, member FINRA / SIPC . Neither SoFi nor its affiliates are a bank.”