What qualifies as liquid assets?
A liquid asset is an asset that can be easily, quickly and securely sold and converted into cash in hand. In other words, liquid assets are seen as cash, as their value remains more or less the same when sold. Furthermore, to classify an asset as a liquid asset, it must be in an established market and with a large number of interest buyers. Also, with an ability to transfer the ownership easily.
Following are the types of assets that qualify as liquid assets:
- Cash is a liquid asset due to its ability to be readily assessed.
- Cash Equivalents, these are investments with short term maturities of less than 90 days. They can be easily converted to cash—for example, stocks, marketable securities, money market instruments, bonds, mutual funds etc.
Recording assets in a balance sheet are categorised based on how liquid they are. Following are examples of liquid assets:
- Currency or cash
- Money in a bank account
- Account receivables
- Mutual fund investments
- Money market accounts
- Stock market investments
- Treasury billsBonds
- Certificate of deposits
- Prepaid expense
Liquid assets are necessary because, in case of emergencies, they act as the safety net for an individual. Financial experts often advise that one should have an emergency fund that covers at least six months of expenses. The emergency fund should mainly cover all the expenses such as bills, medical, repairs, etc.
Is a bank account a liquid asset?
Liquid assets are cash in hand or other assets that can be easily converted into cash at a reasonable price. A bank account is considered a liquid asset as long as the balance in a bank account can be withdrawn without any restrictions. Money in a bank account can be readily used to meet expenses. Hence it is considered as a most liquid asset.
However, a certain bank account has restrictions on withdrawing money. For example, certain fixed deposits and recurring deposits do not allow premature closure of the account to meet financial liquidity. At the same time, some accounts allow premature withdrawals, but with some penalty. As an individual, one should be holding cash in accounts that can be readily withdrawn when required. A savings bank account is one such account that is equivalent to holding cash in hand. Therefore, having some amount in the savings bank account will help in meeting unforeseen expenses or emergencies.
What does liquid net worth mean?
Liquid net worth is the value of all assets if sold and converted into cash. The liabilities have to be deducted from the assets before they are liquidated. Also, liquid net worth considers only liquid assets. These assets are extremely valuable. This is because one can easily convert them into cash in case of any emergency. Moreover, liquid net worth is a measure that helps evaluate financial security. Stocks and bonds are an excellent example of liquid assets as they can be converted into cash within three days.
One can calculate liquid net worth by adding all liquid assets and subtracting liabilities. One can consider the following as liquid assets:
- Cash: Cash is the most liquid asset. It includes all bank accounts (savings and current).
- Stocks, Bonds and mutual funds: All these assets can be easily liquidated into cash within 3-5 working days.
- Retirement investments: Any retirement investments can be omitted, or a reduced value can be considered.
- Real assets: One can consider real assets like car and house as liquid assets after deducting 10-20% from the assets.
- Jewellery, collectables, art, antiques etc. are all can be considered at the same value.
Liabilities have to be deducted from the assets to calculate liquid net worth. One can consider the following as liabilities.
- All loans including personal loans and student loans
- Credit card debt
- Any other type of debt
What is a liquid account?
A liquid bank account is that account that is not subject to any withdrawal restrictions or deductions. A current bank account and savings account is a liquid account as it can be used for regular transactions. In comparison, other assets like certificates have a specific duration and maturity date.
While picking an account, it typically is a trade-off between yield (the interest that one can earn on their money) and liquidity. Higher the liquidity, lower will be the yield. For example, savings and current accounts are highly liquid. At the same time, the certificate of deposits is less liquid. These attract certain charges and penalties for early withdrawals.
Liquidity is important to meet day to day and unforeseen expenses. If one has to wait for a couple of days to withdraw money for paying bills and shopping, then it is a big headache. To meet unseen expenses such as planning a short vacation or a surprise, a liquid account is the best option. It is better than using credit cards or other expensive options.
Also, due to lower yields, it is not advisable to hold all the saving in liquid accounts. To be able to generate significant returns and make money grow, it is important to invest wisely. Therefore, have an emergency fund for unforeseen events and invest the rest in high earning accounts even though they are not highly liquid.
What is the difference between assets and liquid assets?
An asset is a resource that has economic value that an individual or company owns. It provides future benefit in the form of cash flows to the individual or company. An asset can be a fixed asset or current asset. Fixed assets are long term assets and cannot be easily liquidated into cash. Whereas current assets are those assets that can be easily converted into cash within one year. Liquid assets are a part of current assets. Few examples of assets include land, buildings, cash and investments.
Liquid assets are those assets that one can easily convert into cash. They are highly liquid and can aid in times of emergency. Liquid assets are cash, investments like stocks, bonds and mutual funds.