Consider the resources readily available to you and, if they are called upon, might be used to cover the cost of anything within a reasonable length of time. These liquid assets include cash on hand, monies held in checking and savings accounts, and even certain investment funds.

Find yourself in a sudden financial bind and trying to pay for anything. Understanding the overall worth of your liquid assets accurately might be extremely important. Because of this, they are particularly useful additions to your savings for unexpected expenses. Let's look at the two most popular liquid assets: cash and investments.

Cash and Cash Equivalents

Because it does not need any further work to be converted into cash, cash is considered one of your most liquid assets. You may use it to pay for a product or service immediately, and you can also use it to pay off any debts that are still due. The most common places for financial institutions to store cash are checking savings and money market accounts. You can swiftly withdraw money from them to pay off debts or other obligations.

The term "cash-like accounts" may also refer to other types of money, such as a trust fund, tax return, court settlement, and even some CDs. Even though they are not cash, it is often not too difficult to convert them into cash so that you may complete a transaction as fast as possible. In the event of a certificate of deposit (CD), keep in mind that the terms of the account determine this; in many instances, there is a penalty for withdrawing your money before the period has been completed.

Taxable Investment Accounts

If you have several different investment accounts, you can liquidate them and convert their holdings into cash within a fair time; however, this process will take longer than it would for some of the accounts described in the previous paragraphs. Investment accounts are highly liquid assets since they may be converted into cash within a few weeks or months, depending on the account. Investing accounts can hold many different types of securities, including the following:

• Stocks
• Bonds
• Money market funds
• Investment options on the stock market that include mutual funds and other sorts of investing

Even while investment accounts are considered liquid, you shouldn't depend on them in the same manner as you do your cash accounts because of the risk involved. This is because making investments in securities exposes one to the possibility of suffering a financial loss. This means that if the market experiences a decline, you can see part of your wealth reduced. You can sell your assets, but it is possible that you may not earn back the same amount of money that you first invested.

In a general sense, the term "true liquid" may only be used for accounts that are subject to taxation. Compared to tax-advantaged retirement plans, which have varying degrees of liquidity but generally restrict your ability to sell your assets, this stands in stark contrast. Because you would still be required to pay early withdrawal penalties to the IRS, IRA plans cannot be deemed liquid if the account holder has not yet achieved the age at which they are eligible to retire. However, if you believe that your circumstances necessitate a waiver of the 10% early withdrawal penalty, you may claim a hardship withdrawal.

Cash Equivalent Business Assets

Businesses have liquid assets, often known as cash equivalents or assets that may readily be converted into cash via sales. Accounts receivable and inventory are two types of assets that fall within this category. The cash owed to the company by its clients is called its accounts receivable. You should be able to collect all or the majority of the amount that is owed to you in the future, which will allow you to qualify for financing based on the outstanding amount.

"Inventory" refers to an item purchased to later resell for a profit. Because both of these assets need to be converted to cash at some point, the value normally assigned to them in an appraisal is far lower than the value the firm attaches to each.

Bottom Line

It is essential to ensure that you have sufficient cash and other liquid assets to pay for your day-to-day costs and deal with an unexpected event or significant shift in your life. In the long term, understanding which of your assets is more liquid than others can save you time while also allowing you to circumvent any roadblocks.

When you apply for a mortgage, for instance, the lending institution may look at the number of liquid assets you have in your possession. They do this to guarantee that even if anything unforeseen occurs, you can still keep up with your regular mortgage payments.