Many words come up that may be foreign to you in finance discussions, especially if you aren't well-versed in the subject. Sometimes you can get by without understanding them, but usually you should try to gain at least some sort of understanding to make things easier to comprehend. It will also make you a better financial individual.
In order to understand what liquid assets are, you need to understand each individual word first. Liquid assets are an important part of a good investment portfolio, and with the right knowledge, it can help you maintain a high rate of return.
Assets are what you own, as opposed to liabilities, which are what you owe. For example, if you have $1,000 in a certificate of deposit, that is an asset valued at $1,000. A house or building can be an asset, too, as long as you own it flat out. If you have a mortgage, that is a liability. The asset is only the equity you have in the house. Your net assets equal your assets minus liabilities.
Liquidity refers to how fast something can be turned into cash. The faster it can be turned into cash, the more liquid it is. Therefore, a liquid asset is cash or an asset that can be quickly turned into cash. For example, if you have money in a savings account and you can withdraw it at any time, that money is liquid. However, cash that you are holding in your hand is even more liquid because you can spend it right away, whether the bank is open or the ATM is close by or not.
Other liquid assets include savings account funds, checking account funds, etc. Short term investments such as short term CDs or bonds can be liquidated, but you have to wait for maturity or forfeit some interest for penalties. Stocks can be sold fairly quickly, but you may or may not have gains yet, depending on why and when you are selling them.
An example of a very illiquid asset is real estate. If you want cash from your house, you will need to put it on the market, wait for an offer, accept the offer, and wait for the funds to be given to you. Depending on the real estate market, this can take a very long time, at least a few months. Don't put your money in real estate or other illiquid assets if you know you will need it soon.
How much should you keep in liquid assets? You should always have an emergency fund in liquid assets such as a savings account. Save at least 3 months of living expenses, preferably 6 to 8 months. This will ensure that you are covered in case of an emergency. If you are investing in stocks or other investments, always keep some money in cash to make a new investment.
