Understanding Liquid Assets and Why They Are Essential for You

Should a recession come in 2023, households and businesses will want liquid or cash-equivalent assets that they can quickly convert into cash without loss of value to continue to pay their monthly bills and living expenses.

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Understanding Liquid Assets

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What Are Liquid Assets? Liquid assets are cash equivalents that can be converted into cash quickly at low risk of loss in value. Having liquid assets means a business or household has funds free from financial risk.

These are typically financial assets facilitated by the market that can be bought and sold by many available buyers and sellers. Unlike household assets like a car or a home, these assets are closest to cash and provide fluidity, flexibility, and an enhanced ability to make timely payments for living expenses, save for current needs, and handle emergencies.

Why Is Liquidity Important? The US personal savings rate was 3.4% for December 2022, well below pre-pandemic levels. The Federal Reserve estimated that 40% of families could cover three months of living costs. The inability to pay your bills on time, face an emergency, or pass on an opportunity that requires funding, results from liquidity risk.

Liquid Net Worth Is a Realistic Snapshot of Your Cash Position Net worth is a valuable benchmark for measuring your financial health at a particular time. It’s simply the difference between total assets and total liabilities. However, net worth focuses on all your assets, painting a less accurate picture of your cash position than liquid net worth.

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Market Liquidity In financial markets, securities like stocks and bonds are bought and sold. Financial assets are more liquid than other household assets like cars and jewelry. Market liquidity is the ease of selling financial securities at relatively efficient prices in their respective public markets.

Examples of Liquid Assets Liquid assets vary in their ability to convert into cash quickly. We’ll start with the most liquid assets and compare them to non-liquid investments.

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