What Are Liquid Assets?
An asset is an economically valuable resource that provides benefit to an individual or business. It can be classified as liquid (short term) or non-liquid (long term). Liquid assets can be quickly converted into cash with minimal losses.
Bank notes, short-term promissory notes, treasury bills and other government bonds and bank accounts are examples of liquid asset. A foreign exchange market is considered to be the most liquid market because a high volume of cash is traded every day based on an exchange rate.
It is important to invest in liquid assets to ensure there is cash available in an emergency or downsizing. An individual or business with liquid assets is also in a better position to pay back any debt obligations when due. In fact, it can be one of most important financial decisions you make.
Liquid vs. non-liquid
There are key differences between liquid and non-liquid assets, such as:
- Liquid assets are assets which can be easily converted into cash but non-liquid assets are fixed assets and have long-term value. They are not invested with the intention of consuming it or converting it into cash within a year. Some examples of non-liquid assets are land and real estate.
- Non-liquid assets provide the structural basis for a business in the long-term, whereas liquid assets are used to pay day-to-day expenses and run the business.
- Liquid assets have a stable market value but are negatively affected by inflation. However, non-liquid assets cannot be sold fast for cash.
You have an emergency fund when you have liquid assets and that’s why you need to take inventory of how much you have on-hand. However, your non-liquid with assets are also important because it’s an indicator of the health of your business. Having liquid cash that can support your expenses for about six months is considered ideal for emergency situations.
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