Liquid Asset

Definition - What does Liquid Asset mean?

A liquid asset includes any asset—such cash, money market mutual funds, savings account funds or other assets that can be sold quickly—where the sale of such an asset does not cause financial loss for the investor.

Justipedia explains Liquid Asset

Cash remains the most liquid asset compared to other liquid assets such as jewelry, collectibles, property, cars and real estate. Other assets—such as stocks, bonds and mutual funds—are also fairly liquid, and they can be bought and sold quickly and without much negotiation between the buyer and seller. Unlike cash, however, stocks and bonds may suffer a more substantial decline in value at the point of sale.

Individuals need to have a certain amount of liquid cash to ensure that they are able to pay their daily expenses. For example, tying up cash in investments and having insufficient cash flow can be expensive, especially if an individual does not have enough liquid cash to cover the costs of unexpected emergencies, such as an expensive home repair or hospital visit.

While having liquid assets allows an investor to easily convert their investments to cash, having too many liquid assets can also have some disadvantages.

For example, investors who keep too much cash in liquid accounts and fail to invest in more aggressive investment vehicles, such as stocks or real estate, may have lower risks of loss, but they may also have limited opportunities to earn profits. In fact, investors who are too conservative with their investments may find that they fail to earn enough interest in their savings and checking accounts to keep up with inflation.

So, how much should you have in liquid assets? Financial experts disagree, but the number is generally between six to eight months of your personal expenses, which includes your home mortgage, car payments, insurance expenses, credit card expenses, utility costs, medical care costs and any unusual expenses.

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