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Key Points:
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Liquid assets are short-term investments used to finance unexpected financial issues.
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Your liquid investments are your first responders to these emergencies, putting out any fire that starts early before it becomes a larger issue.
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Liquid assets are your financial safety net, needed to navigate life’s unpredictabilities.
Many of you are wondering, “what are liquid assets?” as there has been much in the financial community about how to invest to be prepared for the unexpected. This is where liquid assets come in. Below, we will go over how having accessible funds can be your ally for unexpected financial needs.
What Are Liquid Assets?
Liquid assets are short-term investments used to finance unexpected financial issues, allowing easy access to cash without any significant loss in value. In the next sections, we will review some liquid asset examples and what liquid investments are good for your portfolio.
Cash
Cash is king in the liquid asset world. Cash is ready to use anytime, anywhere, whether it’s the money in your wallet or your checking and savings accounts.
Stocks
Stocks are relatively liquid, but beware of the volatility associated with this investment type. You can typically sell them on short notice with a minimal waiting period until you can access the cash, usually in a matter of days. However, beware that market conditions affect stock value, so a speedy sale might not always be profitable, especially if done at an inopportune time.
Real Estate
Real estate is normally a much less liquid asset. Although it’s often valuable, selling property can be slow, taking weeks, months, or even longer. It can help you with your overall wealth, for sure, but liquidity in a pinch is not a strong suit of this asset class.
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Cash Equivalents
You can have cash-like investments, which are quite liquid and can be sold quickly. These are things like money market funds, Treasury bills, or commercial paper. They all have the same characteristics: stable, low-risk, and easily converted into cash.
Retirement Accounts
Funds in retirement accounts like 401(k)s or IRAs can be a mixed liquidity bag. They’re your money to use, but withdrawals often have penalties and tax implications. Funds in retirement accounts are generally used for longer-term purposes and should only be used for immediate liquidity when you’re in a tough spot - and consult with a tax or investment expert before doing so.
Certificates of Deposit (CDs)
CDs are fixed-term, but liquidity does remain for this asset class. You can normally cash them out early if needed, but beware of potential early withdrawal fees. There are also laddering strategies and penalty-free withdrawals for some CDs.
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The Role of Liquid Assets in an Emergency Fund
Your emergency fund is your financial safety net, helping you when unexpected expenses in life arise. The strength lies in the amount of liquid investments you own, which can offer a buffer to help you navigate these uncertainties without taking on debt or being under financial strain.
The liquid investments can be accessed quickly, normally within a day or two at most, and can be used for all purposes, whether it be a medical emergency, job loss, or other unexpected major expense. But be sure to keep as much liquidity as you need, as you are often forgoing higher returns on less liquid investments.
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The Importance of Liquidity in Emergencies
Financial emergencies are just that - unexpected scenarios that need immediate attention. Your liquid investments are your first responders to these emergencies, putting out any fire that starts early before it becomes a larger issue.
- Medical Emergencies: We often face unexpected health issues that require immediate treatment and, consequently, immediate payment. In these stressful times, your liquid assets are a way to cover your medical expenses without the added anxiety of figuring out where the funds will come from.
- Job Loss: Losing a job is challenging both emotionally and financially. Setting aside some liquid assets can serve as a buffer between you and extreme financial hardship, covering essential expenses while you search for new employment. Maintaining your living standard and reducing stress during this transition period can be a safeguard.
- Unexpected Major Expenses: Something can always happen unexpectedly, like a sudden home repair after a storm or urgent fixes for your car. These can disrupt your financial situation, but having liquid assets can ease the burden that comes up. You can manage the expenses as they come, avoiding any additional charges or interest costs from a loan.
- Natural Disasters: When natural disasters occur, having immediate access to funds is very important. You might need to secure temporary housing, buy some essentials, or cover some repair costs - with liquid assets, you can access cash quickly and without hassle, ensuring you and your family is as comfortable as possible during difficult times.
Ways to Build Your Liquid Savings
Building up your liquid savings doesn’t have to be a challenge. With a few strategies and the right ones for you, you can build your financial safety net while maintaining your lifestyle. Here are a few ways to grow your liquid assets for when you need them the most:
Setting Savings Goals:
Start your savings with a clear goal. Determine a specific amount you want to save, and by when. If you have a tangible goal it will keep you motivated and on track, and remember, even small amounts will accumulate over time - no goal is too modest.
Budgeting and Cutting Expenses:
Budgeting and cutting unnecessary expenses is a great start to building up your liquid assets. Track your spending, categorize expenses, and identify where you can make cuts. Maybe you dine out less for a few months or cancel some unused subscriptions - freeing up even a small portion of your income can boost your savings over time.
See here: 50/30/20 Budget Calculator
Strategies for Increasing Income:
If you don’t want to cut expenses, you can also consider ways to bring in more money. Maybe you take on some freelance projects, sell some items you no longer need, or even turn a hobby into a small business. Extra income can go straight into your liquid savings, accelerating your progress toward your financial goals.
Choosing the Right Savings Account:
Not all savings accounts are created equal. Research your options to find the ones with the best terms and lowest fees for your situation. For example, find the most favorable interest rates, low fees, and best customer service. Don’t hesitate to use online banks; some of them offer better rates than traditional ones. You want your savings to work for you!
If you can adopt one or all of these strategies, you can build a financial buffer to protect yourself and your loved ones in times of need. Smart money management is key; making decisions today will help your future self.
The Bottom Line
Liquid assets are your financial safety net needed to navigate life’s unpredictabilities. From cash to stocks, these types of liquid assets can offer peace of mind and flexibility. The best day to start saving was yesterday, but the next best day is today - so get started!
FAQ
What exactly defines an asset as 'liquid'?
An asset is considered 'liquid' if it can be quickly converted into cash without losing much or no value. This includes checking or savings accounts, stocks, and government bonds, among others.
Are all investments considered liquid assets?
No, not all investments are liquid. For instance, real estate and certain retirement accounts may require more time and effort to cash out, often accompanied by penalties or fees.
How much of my savings should be in liquid assets?
This can vary based on individual financial situations and comfort levels. However, many financial experts suggest keeping enough liquid assets to cover at least three to six months' worth of living expenses.
Can I rely solely on liquid assets for long-term financial security?
While liquid assets are key for short-term needs and emergencies, it's also important to have a balanced approach with long-term investments, which might have higher returns over time.
How do liquid assets relate to my overall financial health?
Having liquid assets means you're better prepared for emergencies and unexpected expenses. It's about having the freedom and flexibility to access funds when you need them most, contributing to overall financial stability and peace of mind.
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Matthew is a freelance financial copywriter with 14+ years in financial services. He holds a Bachelor of Science degree in Economics with business and finance options and is a CFA Charterholder. He is from Vancouver, Canada, but writes from all over the world.
