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Understanding Liquid Assets and Why They Are Essential for You

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

Examples of liquid assets are savings and checking accounts, money market securities with short-term maturities, and highly liquid markets like Treasury bills and certificates of deposit.

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.

The inability to pay your bills on time, face an emergency, or pass on an opportunity that requires funding, results from liquidity risk. Without liquidity, you may pay for your needs with credit cards that carry toxic interest rate costs.

Why Is Liquidity Important?

You may have a beautiful home or a vintage watch collection, but it will take time to sell those assets, potentially at a significant discount from their appraisal value.

Liquid Net Worth Is a Realistic Snapshot of Your Cash Position

Financial markets are where securities, such as stocks and bonds, are bought and sold. Financial assets are more liquid than other household assets like cars and jewelry.

Market Liquidity

Although securities are more liquid through electronic exchanges than selling other household assets, they vary according to factors like a bid-ask and daily trading volumes. The smaller gaps between the bid and ask prices and higher volumes indicate desirable market liquidity.

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