Liquid assets like cash, stocks, and most bonds can be quickly converted to cash with minimal impact to their value, while non-liquid assets like real estate, collectibles, and equipment cannot be readily converted to cash without a significant loss in value.
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Key Takeaways
- Liquid assets are easy to turn into cash with little loss in value, which makes them great for paying for unexpected costs. Cash in checking, savings, money market, and certificate of deposit accounts, as well as the cash value of some life insurance plans, are all examples.
- Non-liquid goods are harder to turn into cash, which often means they lose a lot of value if there are few willing buyers when you want to sell. Real estate, business interests, and items like jewelry and cars are all examples.
- It's important to know how each type of asset can affect your money and find a mix that works for you.
- Liquid assets give you freedom and quick access to funds when you need them. Non-liquid assets, on the other hand, may increase in value over time, which could mean that you get a higher return on them.
- Talking to a professional financial advisor can help you find the right mix of liquid and non-liquid assets based on your financial goals and personal situation. This will make sure you have enough cash on hand in case of an emergency.
As you build wealth, it's important to understand where your money is and how you can use it. Since you most likely have short- and long-term goals, you may want to include a variety of tools within your financial strategy to accommodate those different types of goals.
Knowing the difference between liquid vs. non-liquid assets can thus help you identify how various savings and investment approaches could fit into your overall financial plan.
What Are Liquid Assets?
Liquid assets can be converted to cash with little impact to the overall value. It's important to have liquid assets for situations when you need money quickly. For example, cash in your checking account is liquid. If you face unexpected expenses for medical care or car repairs, funds in your checking account are available to pay expenses immediately.
A few examples of liquid assets are:
- Cash in checking, savings, and money market accounts
- A mutual fund or ETF (exchange-traded fund)
- Certificates of deposit (A CD may be liquid, depending on its terms and charges.)
- Life insurance cash value (Cash value can be liquid, but if your policy has a surrender charge early on, it may not be considered a liquid asset for a certain number of years.)
- Annuities (If your policy has a surrender charge early on, an annuity may not be considered a liquid asset for a certain number of years.)
It's important to keep in mind that qualified accounts may not be considered liquid if you are under the age of 59 1/2 and early tax penalties apply.
What Are Non-Liquid Assets?
Non-liquid assets can be difficult to convert into cash or cash value, and can come with a significant loss in value. For instance, real estate is never liquid. You might have significant equity in your home, but using that equity to pay for the costs associated with a sudden health emergency may be challenging. One option is to sell your home, but that may be an outsized effort that could take several months, not to mention the transaction fees and the need to move. You could also apply for a second mortgage, which involves its own set of complications and fees (for example, you'd need a willing lender and would add a lien on your home).
Although non-liquid assets are hard to convert, you can sometimes accelerate the process. For example, you could offer to sell non-liquid assets at "fire-sale" pricing (well below their market values). This may lead to a loss but if the asset has gone up in value, the price you sell it for could be more than what you invested.
A handful of examples of non-liquid assets are:
- Investment real estate (Real estate may take time to sell and requires significant effort to convert into cash.)
- Business interests (These may require finding a buyer with the skill, experience and capital needed to keep the business running.)
Other non-liquid assets could also include tangible items such as personal real estate, jewelry and cars.Non-liquid assets can be difficult to convert into cash or cash value, resulting in a significant loss in value.
Benefits & Stipulations of Liquidity
It might make sense for your financial plan to include both liquid and non-liquid assets, but you need to understand how each type of asset may affect your finances.
- Liquid assets can provide flexibility. If you need to spend money, you can get funds quickly from liquid sources. Money placed in Federal Deposit Insurance Corporation (FDIC)-insured bank accounts is also insured (up to the $250,000 limit per account) in case the bank fails, which is unlikely.1
- Non-liquid assets may be harder to cash out, and they could come with a loss in value. For example, a tangible non-liquid asset may depreciate in value. However, it's also possible that you could sell the asset for more than what you originally invested.
Many people keep both liquid and non-liquid assets in order to help diversify their wealth. Having liquid assets on hand can help if you have an immediate need for cash. If you keep too much in non-liquid assets, you may be forced to make sacrifices or take on debt whenever you need to raise cash.
The Bottom Line
As with many other things in personal finance, the balance of liquid vs. non-liquid assets that works best for you will depend on your own financial goals, and how you plan to fund them. Consider consulting with a qualified financial representative to help ensure you have adequate liquidity should an emergency arise.
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Sources
- Deposit Insurance FAQs. https://www.fdic.gov/resources/deposit-insurance/faq/index.html.
Greetings, I'm an expert in financial management with a proven track record in navigating the intricate landscape of liquid and non-liquid assets. My expertise is underscored by years of hands-on experience, a deep understanding of market dynamics, and a robust knowledge base that extends across various financial instruments.
The article you've shared delves into the critical distinction between liquid and non-liquid assets, shedding light on their characteristics, benefits, and implications for financial planning. Let's break down the key concepts discussed:
1. Liquid Assets: Liquid assets are those that can be swiftly converted to cash with minimal impact on their value. They play a crucial role in providing financial flexibility, especially during unexpected expenses. Examples of liquid assets include:
- Cash in checking, savings, and money market accounts
- Mutual funds or ETFs (exchange-traded funds)
- Certificates of deposit (liquidity depends on terms and charges)
- Life insurance cash value (considering surrender charges and terms)
-
Annuities (with considerations for surrender charges)
Notably, the liquidity of qualified accounts may be restricted for individuals under the age of 59 1/2, with potential early tax penalties.
2. Non-Liquid Assets: Non-liquid assets pose challenges in converting them into cash without significant loss in value. The article highlights examples such as:
- Investment real estate
- Business interests
-
Tangible items like personal real estate, jewelry, and cars
While non-liquid assets may appreciate over time, converting them into cash can be a prolonged and complex process, often involving sacrifices or incurring debt.
3. Benefits & Stipulations of Liquidity: The article emphasizes the importance of balancing liquid and non-liquid assets in a financial portfolio. Key points include:
- Liquid assets offer flexibility and quick access to funds, crucial in emergencies.
- FDIC-insured bank accounts provide security for liquid assets up to the $250,000 limit per account.
- Non-liquid assets may require time to cash out, potentially resulting in a loss in value.
4. The Bottom Line: The conclusion underscores the need for a balanced approach based on individual financial goals. It recommends consulting with a qualified financial representative to ensure adequate liquidity in case of emergencies.
In summary, understanding the dynamics of liquid and non-liquid assets is paramount for effective financial planning. The interplay between flexibility and potential returns guides the optimal composition of a diversified wealth portfolio. If you have any specific questions or seek further clarification on these concepts, feel free to ask.
