Liquid assets are quickly convertible to cash without losing much value, including currency, checking accounts, and some investments. Real estate and non-valued items are considered illiquid. Businesses should balance being liquid enough to break even but not missing investment opportunities.
Liquid assets are cash on hand or any tangible or intangible item that can be quickly and easily converted to cash, typically within 20 days, without losing much of its value. These assets are among the most basic types of financial resources used by consumers, businesses, and investors. Cash and checking accounts are the two most obvious forms of liquid assets.
Currency
Legal tender for purchases and to settle outstanding debts, currency remains the most common type of liquid asset consistently used by retail consumers. Money deposited in a checking or savings account is considered a liquid asset because funds are immediately available to pay off debts. The debit card offers consumers even greater access to immediate liquid assets.
Investments
Some interest-bearing investments can be liquidated quickly, qualifying them as liquid assets. Stocks of money market funds, bonds, mutual funds, and the cash value of a life insurance policy are examples of investments that can provide quick cash when needed. Certificates of deposit and shares may also qualify under this definition. While the actual market liquidity of each asset can vary, the key is that there are always people looking to buy these items, so they can be sold relatively easily. In the case of some jointly owned assets, only a percentage of an asset could be considered liquid.
Other assets
The final settlement awarded by a court for damages in a lawsuit may also be considered a liquid asset, depending on the payment terms specified by the court. Tax refunds and trust fund balances are often included in the working definition of liquid assets.
Less liquid and non-liquid assets
Mortgages are sometimes considered a liquid asset, but they are much less liquid than many other types. Real estate is also more likely to sell for less than its value if it must be liquidated quickly; If the market is unstable, it can also be difficult to determine the true value of real estate. Since a key part of liquidity is for the asset to sell at or very close to its true value, this means that real estate is often considered “illiquid” or not easy to sell.
Any item for which there is no set value is not considered a liquid asset, even if that item can sell for a high price. When the market for the item is small or uncertain, a sale could significantly affect its value. Even shares, generally considered a liquid asset, could become illiquid if a large block is put up for sale, which could reduce their market value.
business assets
For businesses, liquid assets can include cash, marketable securities, and accounts receivable. Cash equivalents, which can be quickly converted to cash as needed, are also considered liquid. A business should be liquid enough to break even, but not have so much cash on hand that short-term investment opportunities are not pursued.
Companies often divide their assets into current, quick, and liquid net assets. Net liquid assets are those that would remain if all of the companies’ debts were paid off. Quick assets are those that can be converted into cash immediately, while current assets are those that can be converted within a year.
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