Liquidity
How quickly an asset can be converted to cash without significant loss of value
What You Need to Know
Liquidity refers to how easily and quickly you can convert an asset to cash. Cash and savings accounts are highly liquid, while real estate and retirement accounts are less liquid. A healthy financial plan balances liquid assets for emergencies with less liquid assets for long-term growth.
Liquidity Levels:
- High Liquidity: Cash, checking accounts, savings accounts
- Medium Liquidity: Stocks, bonds, mutual funds
- Low Liquidity: Real estate, retirement accounts, collectibles
Why Liquidity Matters:
- Emergency fund needs (3-6 months expenses)
- Opportunity costs (missing investment opportunities)
- Financial flexibility (job changes, major purchases)
Balancing Act:
- Too much liquidity = missed investment growth
- Too little liquidity = financial stress in emergencies
- Goal: 3-6 months expenses in liquid assets
Example: $50,000 in savings (high liquidity) vs. $50,000 in home equity (low liquidity)
Sources & References
This information is sourced from authoritative government and academic institutions:
- investor.gov
https://www.investor.gov/introduction-investing/investing-basics/glossary/liquidity-or-marketability
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