Whether it's business or personal financial status, assets play a more significant role in determining the stability of both. These holdings act as a resource that has an economic value. It can be helpful to an individual, government or a corporation as it can be converted into cash. This implies these resources are controlled by the business owner, government or an individual with an expectation that he would get certain benefits in the future.
The examples of assets are as follows -
- Accounts receivable
- Cash and cash equivalents
- Property, Plant and Equipment (PPE)
According to financial experts, the properties of assets can be stated as economic value, ownership and resource. Let us understand some more details about liquid assets through this blog. We have covered the points given below on this page -
- What are liquid assets?
- What are examples of liquid assets?
- Which investments are considered liquid assets?
- Why are liquid assets considered to be important?
- What are non-liquid assets?
- How to build liquid assets?
- How can Deskera help you?
- Key Takeaways
What are liquid assets?
According to financial experts, an asset can be described as anything that has a monetary value which is clear from the examples stated above. Liquid assets are those assets which can be easily converted into cash. These assets can be quickly turned into cash by retaining their market value.
As per the subject matter experts, these assets are considered to be an important safeguard for a business owner or even an individual when he is facing financial problems and needs immediate cash. They also assist in contributing to an individual’s net worth. An individual can calculate the total value of his liquid assets to know how much cash he possesses if he ever lands himself in a tough spot.
What are examples of liquid assets?
Even if the definition of this financial term is quite simple to understand, it is always a good idea to know the term by its examples in the real world. The examples of liquid assets can be stated as follows -
- Cash: Physical bills present in your wallet
- Savings account: It is the all the cash present in your bank accounts
- Mobile payment accounts: It includes all the money that is present in your mobile payment services account such as GPay, Paytm, PayPal
- Money market account: It is a savings account at a credit union or bank which has a higher interest rate
- Investments: Certain types of investments such as certificates of deposits, stocks, bonds and money market accounts are counted as liquid assets
- Exchange-traded funds: Exchange-traded funds or ETFs are considered to be investment funds that trade like stocks on public exchanges. It makes them easier and fairly quick to sell and is said to be less risky.
- Mutual funds: These provide easy diversification but are usually traded only once a day which happens when the market closes. These are usually less liquid than other examples of liquid assets such as ETFs and stocks, and the individual gets proceeds from the sale on the next business day.
- Precious metals: Precious metals can be considered liquid assets and can be exchanged for cash via the dealers. For instance, gold can be sold to the jewellers or business owners involved in selling them through their shops. However, if the individual has deposited his gold in a bank account for safety reasons, it might not be easily accessible in dire times of need.
- Treasury bills and treasury bonds: These are considered to be highly stable liquid investments which are backed by the credit of the United States government. Hence, a business owner or an individual can easily sell and convert them into cash even before they get mature.
- Certificates of deposit: These are the liquid assets that earn an individual a higher annual percentage yield (APYs) than the savings or checking accounts. However, they also come with strict withdrawal restrictions and the individual would be required to pay a penalty if he wants to access the money in this before the maturity date.
- Bonds: Many types of trading bonds are said to be relatively liquid investments and can be held till their maturity date.
- Stocks: The publicly traded stocks are considered liquid assets as the individual can receive cash within a few days after he has sold them. As per the available information, equities can be sold on stock exchanges instantly and the individual can see cash deposits in his trading account after some time.
Which investments are considered liquid assets?
It is possible to have some confusion about whether to consider investments under the category of liquid assets. According to experts, the answer to this question is they can be included in this category but it is dependent on what types of investments an individual is talking about. To simplify your queries, we have listed below the different types of investments which can be included under the liquid assets -
- Stocks: The stocks a business owner or individual owns or are held under the company’s name are said to be typically liquid.
- Bonds: A bond is considered to be a low-risk investment loan which provides a steady cash flow for borrowers
- Mutual funds: It is considered to be a fund that has money deposited by many investors to purchase stocks and other securities.
- Treasury bills: These are the liquid assets which as are short-term securities that are issued and backed by the U.S Treasury Department.
- Money market funds: It is different from the money market account. It is a mutual fund with which an individual can invest in highly liquid but short-term securities such as cash and cash equivalents.
- Certificates of Deposit (CD): Certificates of Deposit or CD is considered to be a songs account which has very steep early-withdrawal fees. Furthermore, some special accounts can have low or even no penalty if the individual does an early withdrawal.
- Retirement accounts: As per the rule of liquid assets, a retirement amount can include a 401(k), an IRA and/ or other accounts. This is considered to be a liquid asset only if the individual has reached his retirement age.
Why are liquid assets considered to be important?
Liquid assets are needed for small business owners and even individuals in times of financial emergencies. When an employer or a person encounters any type of unexpected financial trouble in his life, he does not have the time to go through the entire process of putting his house or a part of the business on sale in the market. At such times, there is a need for quick access to monetary funds which will help him to pay for life essentials and in case he is an employer, give salaries to the employees. This will assist him to stay on top of his bills.
Whenever there is a financial situation, it will not matter what the cost of an individual’s net worth is or how many dollars can be seen in his bank account or passbook in the mobile application. What is important in such times is whether there can be access to or not for immediate funds.
If an individual or business owner wants to collect the immediate funds through the mortgage, his lender will also follow a set procedure in this situation. He would determine and verify the type of assets owned by the applicant and understand how many of them are liquid assets. He would then determine whether the applicant has easy access to money kept in reserve to know if he can cover the mortgage payments with ease if the applicant encounters a situation of temporary financial misfortune.
What are non-liquid assets?
Non-liquid assets are those liquid assets which are challenging to sell quickly. For these particular assets, the owner would not receive its payments immediately. According to available information, even if there is a good market and number of interested parties for these assets, the payment for it can require some weeks and even some months. Hence, some of these assets are not considered liquid.
Let us take an example - Imagine a family wants to sell a house or property to pay off the debt obligation given to the bank in a very short period. Now, the time required to sell a particular house cannot be predetermined because it takes a few months to find a suitable investor who is willingly interested to negotiate and pay the price of the sale. As the family will not get immediate cash in hand, this particular asset can be counted as non-liquid. The same procedure would be repeated if a vehicle owner wants to sell his vehicle to another party at the ongoing market rate. It would take time to find a suitable buyer who is willing to purchase the vehicle from the owner by giving cash in hand. Therefore, the vehicle can also be counted as a non-liquid asset.
The examples of non-liquid assets can be stated as follows -
- Real estate
- Furniture and collectables
- Cars, recreation vehicles (RV) and boats
- Retirement accounts such as investment accounts, 401 (k) and IRAs
How to build liquid assets?
If you are an individual or a business owner who is new to liquid assets and has no idea about how to build them, it is very important to get proper information on how to do that as it would prove to be helpful during the time of financial troubles. Here are a few tips on how to build these assets over some time -
- Cut down on the expenses: An individual planning to open a business in the long run or wanting to do some savings for immediate hard cash for times of adversities must train his mind to cut down on unnecessary expenses. It implies that the less money you spend would mean that you are building good net worth. For this, the individual or business owner must perform a periodic budget review of his expenditure and even cut down the extra payments he indulges in because of the spending habits that are assimilated in his nature.
- Divide the liquid assets into multiple buckets: To have proper cash savings, an individual can create four buckets where he can bifurcate his money. It would not only give the individual a deep understanding of his financial position in life but also ensure that he does not spend on unnecessary things. The four buckets that can be used in liquid assets are the income bucket, cash bucket, growth bucket and alternative income bucket.
- Reduce the mortgage loan by paying it off: If you have put your house or other property on mortgage loans, then it is necessary to get the biggest debt off your books. This can be done by starting biweekly mortgage payments which would accelerate the mortgage payoff.
Liquid assets are the types of assets that every individual or business owner should possess because you can convert them into cash in times of financial troubles in life. These assets are known to retain their market value and prove to be of great help to the individual when he needs cash immediately. Hence, when a business owner or an individual should have an accounting book to know how much cash he can get in hand when the need arises. Assets such as houses or vehicles might require some time to be converted into the cash till a suitable buyer is found.
How can Deskera help you?
Deskera Books is an online accounting, invoicing, and inventory management software which has been designed to make your life easier. You can keep a complete track of all the assets with this platform.
A one-stop solution, it caters to all your business needs, from creating invoices and tracking expenses to viewing all your financial documents whenever you need them.
- Liquid assets are the assets which can be converted into cash immediately when there is a financial problem in an individual or business owner’s life.
- Some examples of these assets are cash, mutual funds, exchange-traded funds, bonds, treasury bills, gold and gold jewellery etc.
- The investments that can be included in this category are stocks, bonds, certificates of deposits, retirement accounts and money market funds
- The liquid assets are considered important as they can be used to convert into cash when there is a financial problem in an individual or business owner’s life.
- The non-liquid assets include furniture, real estate, cars or recreation vehicles.