Liquidity is a measure of how easily an asset can be converted into cash or sold in the market. Assets are anything you own of value and can include cash, securities and fixed assets like real estate.
It should come as no surprise that cash – including money in checking accounts, savings accounts, CDs, mutual funds and money market accounts – is the most liquid asset because it’s easily accessible.
Securities such as stocks and bonds can also be easily converted to cash, and are generally considered liquid. That being said, how quickly you can sell securities, along with the value you get from selling, may vary.
Fixed assets such as real estate, retirement savings, annuities, art and jewelry are considered less liquid because they cannot be easily converted into cash.
It takes time to convert these assets into cash, or in the case of a retirement plan, you could face a penalty if you don’t follow the rules of the plan.
An example of when you might need liquidity is if you needed to tap into your emergency fund to cover an unexpected expense, such as a medical emergency or leaky roof.
Your emergency fund should contain money that is readily accessible and it’s generally recommended that you have enough to cover at least three to six months of expenses.
Your liquidity needs might also depend on your financial goals. For instance, if you’re saving up to purchase a home, you’ll need a decent amount of liquidity to cover the down payment.
Liquid assets are an important part of your overall financial picture. Liquid assets, such as cash in your emergency fund, may serve as a safety net.
This article is for informational purposes only and is not a substitute for individualized professional advice. This article was prepared by and approved by Marcus by Goldman Sachs, but does not reflect the institutional opinions of Goldman Sachs Bank USA, Goldman Sachs Group, Inc. or any of their affiliates, subsidiaries or divisions. Goldman Sachs Bank USA is not providing any financial, economic, legal, accounting, tax or other recommendation in this article. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice. Information contained in this article does not constitute the provision of investment advice by Goldman Sachs Bank USA or any its affiliates. Neither Goldman Sachs Bank USA nor any of its affiliates makes any representations or warranties, express or implied, as to the accuracy or completeness of the statements or any information contained in this document and any liability therefore is expressly disclaimed.
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