Finance 101: Liquidity

Nov 7, 2016 by

Finance 101: Liquidity

What is Liquidity?

Liquidity is the ability to easily access the assets that make up your net worth.  If you are able to easily convert an asset into cash, it is considered to be liquid.  If you are not able to easily convert it to cash, it is not liquid.

 

What are examples of liquid assets?

Saving / Checking Accounts

With the exception of any monthly limitations, you can always withdraw money from a savings or checking account when in need.

 

Taxable Investment Accounts

Taxable investment accounts are considered liquid as you can simply sell your investments whenever you need access to your funds.

 

What are examples of non-liquid assets?

Your House

Your home is considered a non-liquid asset because it cannot be easily converted into cash.  Although you can sell it for cash, it could take many months before you do so.

 

Your Car

Similar to your house, a car cannot be easily converted into cash. It can be sold, but the process is typically a long process.

Why is liquidity important?

As we all know, life is full of unexpected events.  When one of these events pops up, you will want to be able to access your money as quickly as possible. By having an appropriate amount of liquid assets available, you will be set to handle these situations.

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