What Are Liquid Assets?
Liquid assets refer to anything that is owned and can be quickly converted to its monetary equivalent without any loss in its value.
It is common to see people who run into unforeseen losses or are victims of disasters, accidents, or severe health challenges that put a strain on their financial resources. Allude to the fact that liquid cash was hugely important in meeting their needs, avoiding embarrassment, and avoiding bankruptcy.
There is a general misconception about what is or is not considered to be a liquid asset.
The ultimate test for assessing what qualifies to be referred to as a liquid asset is that it can be converted to cash without losing ANY of its value, however little.
Comparatively, non-liquid items can be sold, but doing so might make them lose a portion of their value, especially if the sale is completed in emergency cases.
As such, the following assets that are beneficial long-term are not classified as liquid, namely real estate, recreational vehicles, automobiles, jewelry, sports memorabilia, antiques, musical instruments, etc.
A very notable ‘liquid asset’ is a 401(k) retirement account on the attainment of the retirement age.
As such, cash withdrawals can be made without withdrawal penalties which are essentially reductions. However, there is an exception for individuals who are 55 and older and are challenged financially by the loss of employment or medical expenses.
A 457(b) retirement plan also allows for withdrawals motivated by hardship in the event of unforeseen circumstances, provided there are no other means to meet the need and only the amount of money needed to handle the situation will be dispensed.
The number of liquid assets that any given individual should have depends on several factors. Chief among which is the number of monthly expenses of the individuals. However, most financial advisers recommend that enough liquid assets last an individual and the family for six months be set apart.
Liquid Assets Examples
- Physical cash
- Money in a savings account
- Government bonds
- Mutual funds
- Tax refunds
- Court settlements
- Trust fund monies
- Certificates of deposit.
John decides to invest $50,000 into government bonds. John can hold these bonds and take advantage of a small but consistent interest rate. He can convert the government bonds back into cash at any time. It is a highly liquid asset.« Back to Glossary Index