Liquid assets are cash and other assets that can be readily turned into cash immediately without losing value. These are cash equivalents because the owner can easily exchange them for cash. Having some liquid assets is necessary for potential emergencies and living expenses. However, holding many of them comes with a cost. Like currencies or cash, these assets' value increases less in time. Additionally, you can be a victim of inflation as the cash's value decreases at such times.
What is Liquidity?
The liquidity of an asset is its ability to exchange it into cash within short spans. An asset is more liquid if it's easier to convert into cash. For example, you can easily withdraw money from your bank with an ATM that is highly liquid after cash.
For long-term financial goals, you must buy non-liquid assets like real estate, securities, art, and stocks. However, some of these are hard to convert into cash, so it's challenging to calculate their in-cash value.
As you know what are liquid assets, let's have a look at their examples.
Examples of Liquid Assets
1. Cash and Cash Equivalents
Cash equivalents are investments with short-term maturities of less than 90 days. You can readily convert these investments into cash. Cash equivalents can be short-term marketable securities and stocks, U.S. treasuries, and bonds.
2. Marketable Securities
- Stocks : You can take a company's partial ownership by buying that company's stocks. You can sell these stocks and convert them into cash anytime.
- Money Market Funds: These are short-term funds or securities that you can convert into cash. It's a type of mutual fund.
- Mutual Funds: Mutual funds are funds from investors to buy corporate, government, or similar assets. These are liquid assets, and you can turn them into cash after a period.
3. Money Market Funds
These are open-ended mutual funds with short-term debt securities similar to treasury bills. You can convert these assets into cash. These are the best liquid investments and also pay you in the form of dividends.
4. Certificate of Deposit
A certificate of deposit is a financial contract between you and your bank or other financial institution. The institution pays you interest on a specific amount for a specific time. You can withdraw the deposit and convert it into cash.
5. Precious Metals
Metals like gold, platinum, and silver are highly recommended liquid assets. These metals' value may increase due to limited access, industrial use, and scarcity. You can also use precious metals to hedge against inflation.
6. Treasury bonds and Treasury Bills
These are short-term money market securities. You can buy treasury bills below principal value and get face value while redeeming them. That way, you make a profit while converting your asset into cash.
7. Prepaid Expense
These are future costs that are already paid for in advance like rent and insurance. On the balance sheet, these costs are first recorded as an asset. The associated sum is recorded as a cost when its benefits are gradually recognized.
Exchange-traded funds are funds that you can trade with the stock exchange. You can convert these stocks into cash. These are low-risk and low-cost investments. ETFs can diversify your portfolio and come in handy in emergencies.
Examples of Non-Liquid Assets or Illiquid Assets
You can't easily convert non-liquid or illiquid assets into cash. As the name suggests, these are opposite to liquid assets. However, these investments may offer better interest rates and profits. Here are some of their examples:
1. Private Equity
Private equities are investments in private companies. You may get substantial returns on these assets. However, there are limits on the timings of shares. These are difficult to convert into cash.
2. Real Estate
It's one of the most popular non-liquid assets. Real estate is not only about buying and selling property. You can earn through commissions, mortgages, interests, rents, and more. However, when you want to sell the property, it may take time to find the perfect buyer and convert the investment into cash.
3. Intangible Assets
Intangible assets are ideas or thoughts that may generate wealth. It can be intellectual property, reputation, brand recognition, or goodwill. These ideas are highly illiquid, and it's tough to put a price on them.
4. Stock Options
An employee gets a certain amount of the company's stock, and if they stay with the company, they may get profits. However, these stock options take years before you acquire guaranteed shares.
Collectables are artworks and similar assets. Finding a suitable buyer for artwork can be time-consuming, so you cannot easily convert them into cash.
What is Liquid Net Worth, and How to Calculate it?
Liquid net is the total of your cash and cash equivalents minus your liabilities from these assets. When your liquid assets are overweight, the liabilities for them, you have a positive net worth. On the other hand, you have a negative net worth if your debts are more than your assets.
Liquid Net Worth = Cash + Cash Equivalents - Liabilities
People get confused between total net worth and liquid net worth. When calculating liquid net worth, we must consider only cash and liquid assets with the liabilities or costs for keeping them. On the other hand, while calculating total net worth, we must calculate every investment, debt, and liability.
The Bottom Line
A balance of liquid and non-liquid assets in your portfolio makes it diversified. You can keep the cash handy by investing in liquid assets like bonds, precious metals, and stocks. On the other hand, investments in real estate and art can become your long-term profit funds. Do you want to learn to invest in real estate? Join compound Real Estate Bonds- The First Liquid Real Assets backed investment vehicle. Start compounding High Yield daily interest and withdraw at anytime.