Have you ever wondered what a liquid investment is? Or have you ever had someone ask you what your liquid net-worth is?
A liquid investment or liquid asset is just a simple way to say, “I could turn this asset into money right now if I wanted to.” Liquidity is the ability to convert assets into cash quickly.
This article will dive deeper into what liquid investments and liquid assets are and explain what non-liquid assets and investments are in straightforward examples.
A liquid investment is a type of investment that is instantly available in cash or can easily be converted into cash. A liquid investment can be sold or converted anytime without losing any original value. A liquid investment is considered a safe investment because liquid assets can be thought of as cash-equivalent assets and are easy to sell quickly.
Liquid investments are safe investments because your money is not tied up into a specific investment. Liquid investments are also great for short-term goals, such as an upcoming wedding or baby shower within the next year.
As the COVID-19 pandemic continues, it’s good to understand what liquid assets are if you need to access funds quickly, as, unfortunately, many people have been forced to do.
Generally, if you need to access your money in a short period of time, you will want to ensure that your investments are liquid and accessible.
It’s important to have liquid assets available if you need money or cash quickly for an unexpected expense or emergency. Most experts recommend most adults have enough liquid savings for 3-6 months to be safe. If you are interested in learning a quick saving trick, be sure to read my article, “How Much To Save Each Month – A Quick Money Rule,” later on.
A non-liquid investment is just the opposite of a liquid investment. A non-liquid investment can’t easily be converted into cash and may lose value if converted or sold.
Now that we have the basic idea of liquid investments, let’s dive deeper into what liquid assets and non-liquid assets are in a bit more detail.
Five examples of liquid investments:
- Cash
- Checking or Savings account (including high-yield)
- Money-market accounts
- CD’s (certificates of deposits)
- U.S Government-issued securities
1. Cash
Cash itself is the most liquid type of asset or investment because it is already in the most liquid form it can be.
Cash is called legal tender, which means it is legally recognized as a country’s national currency. It is usually effortless to pay for something with cash because there is no need to convert or change it.
Most people prefer to have a cash payment versus a check payment because cash is much easier to access, deposit, and use.
2. Checking and savings accounts
A checking or savings account is also a form of liquid investment because the funds in these accounts can be quickly withdrawn from your bank in the form of cash within a few minutes.
Having money in a checking or savings account is almost the same thing as having cash ready. The only difference is that you are using a debit card to get the money out.
Even though the money from checking and savings accounts gets stored in a bank, you can access your money with a debit card quickly if needed, which makes both checking and savings accounts a liquid investment.
Are high-yield savings accounts considered liquid, too?
Yes, high-yield savings accounts are also considered a liquid type of account. High-yield saving accounts are federally insured high-interest accounts, which help your money grow faster than just a regular checking account.
3. Money-market accounts
Money market accounts are similar to savings accounts but generally pay a higher interest rate than regular savings accounts. However, most money-market accounts have a particular minimum balance requirement to invest.
Before the COVID-19 pandemic, money market accounts, or money market deposits, paid a higher interest rate, which enticed savers to save more.
However, the Federal Reserve has lowered interest rates to an all-time low. The Federal Reserve’s relation to interest rates tends to impact savers the most. One of the Federal Reserve’s main jobs is to stabilize the economy. A common way to stabilize the economy is by raising or lowering the cost of borrowing money. When the central bank lowers its rate, most financial institutions tend to pay less interest on high-yield savings accounts.
Following the Fed’s last meeting on January 26th-27th, the Federal Reserve decided to keep the federal funds rate at a range of 0 to 0.25 percent until the economy turns around.
“Having liquid cash in an online savings account is a great comfort in such uncertain economic times and amid market volatility.”
Greg McBride, CFA
4. Certificates of deposits (CDs)
On the topic of savings accounts, a CD is another type of federally insured savings account that earns a fixed (unchanged) rate for a specific fixed term.
By committing to keep your money at a fixed rate for a certain amount of time, you will earn a steady amount of return. The return is usually higher than most savings accounts and is better than just keeping your money in your Wells Fargo checking account, for example.
If you are interested in calculating CD rates of return, use this free CD calculator by NerdWallet.
5. U.S Government-issued securities
The last type of liquid asset example is government-issued securities. Government-issued securities are securities backed by the government, which makes them risk-free investments.
When you buy a U.S Treasury security, you lend money to the government for a specific amount of time (or until maturity) to help fund special government projects and day-to-day government operations.
The most common type of U.S government securities includes treasury bonds, bills, and notes, all liquid types of investments.
The most significant difference between a treasury bond, bill, and a note is the maturity date. Below are the securities listed by longest to the shortest maturity date.
The maturity date is just the date that investors start to receive interest payments.
Treasury bond (T-bond): A T-bond is fixed-rate U.S government debt security that pays semiannual interest payments until maturity. T-bonds have the most extended maturity date from 20 and 30 years.
Treasury note (T-note): A T-note is a fixed-rate security that earns a fixed rate of interest every six months up until the maturity date. T-notes are issued in terms of 2-10 years.
Treasury bill (T-bill): A T-bill another type of U.S debt security with the shortest maturity ranging from a year or less.
Now that we’ve discussed liquid investments, let’s take a more in-depth look into the opposite of liquid investments: non-liquid investments.
Again, non-liquid investments are those types of investments or assets that cannot be readily liquidated or turned into cash.
Three examples of non-liquid investments:
- Real estate
- Cars
- Hedge funds
1. Real estate
Real estate is one of the best examples of a non-liquid asset because it can take months to receive money from selling real estate.
Although real estate can be a great form of passive income, it is not an ideal income source if you need to have the money in a short time frame. It can take a long time to fix up or sell a home!
2. Cars
Like real estate, selling a car isn’t a quick process and can take lots of time. Additionally, cars tend to lose value over time, and you most likely won’t receive the same amount you originally bought it for.
3. Hedge funds
A hedge fund is a type of aggressive investment that is actively managed and seeks extreme returns. To pursue high returns, hedge fund managers employ a wide variety of investment strategies and often charge higher fees.
Due to a hedge fund’s purpose of seeking high returns, hedge fund investments typically require investors to “lock up” their money for a certain amount of time.
Overall, liquid investments are more easily sold for cash and can be easily accessed. When it comes to your emergency savings or if you know you’ll need money in a short time frame, it is best to have your savings in liquid investments, not illiquid investments.
What is the most liquid asset?
The most liquid asset is cash because there is no lag or time to convert it into something else. In its natural form, cash is already ready to spend!
What are the best liquid assets?
The best liquid assets include the above examples: Cash, checking, or savings accounts (including high-yield), money-market accounts, CDs (certificates of deposits), and U.S government-issued securities.
What is liquid net worth?
Your total net worth is the amount of money you have from both liquid and non-liquid assets after subtracting your liabilities and debt.
Liquid net worth only accounts for the amount of money you have from your liquid investments. A normal net worth calculation will include non-liquid assets like real estate, but a liquid net-worth calculation won’t.
Now that you know what liquid investments are, what is your liquid net worth?
Why does liquidity matter in your investment portfolio?
Liquidity is a crucial factor to consider when investing because asset liquidity will determine when you can access your investments depending on your age, goals, and timeline.
Generally, a younger investor can manage to carry a more significant amount of less liquid investments than someone closer to retiring because of the need to access capital. It is assumed for a young investor that accessing money is less important to them than a retiree who needs money sooner.
I hope this helped explain the difference between liquid and non-liquid investments.
Thank you for reading!
Ashley is a finance graduate from the University of San Francisco and currently works at a financial technology startup in San Francisco that is focused on providing affordable and accessible 401(k) retirement plans to other startups and small businesses. Prior to working at a startup, she was an associate at a large private wealth management firm working with high-net-worth clients. She is born and raised in Orange County, CA, and loves spending time at the beach, in a pool, reading, and with her friends.
[…] more about general liquidity in terms of assets and investments, check out my article titled, “What Are Liquid Investments? Explained with Clear Examples.” Liquidity also is essential when it comes to buying and selling […]