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When you invest, you need investments you can quickly turn to cash. You never know when you’ll need more money for an emergency or other important event. Tying your money up in illiquid investments is dangerous and could cause financial issues.
Balancing out your portfolio with liquid investments reduces financial stress and ensures you always have cash available should you need it.
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What Are Liquid Investments?
A liquid investment is an investment you can quickly turn into cash (or cash itself). Liquid investments and cash are equivalent because you can convert liquid assets into cash while retaining its value.
In order for an investment to be liquid, there must be a demand or market for it, and it must be easy to transfer. Cash is the simplest liquid investment because you can easily transfer it and there’s always a demand.
How Do They Work?
Liquid investments also go by the name cash equivalent. They usually have a maturity date of 3 months or less and will retain their value when transferred or they can be converted to cash immediately.
To turn cash equivalents into cash, you usually trade an asset (such as a stock) for cash. Let’s say you own 10 shares of Amazon stock. If you sell it on the open market, you earn the value of the stock at the time, receiving cash in exchange for the stocks.
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Types of Liquid Investments
Besides cash, the most common liquid investment, the following investments are just as liquid as cash.
You may earn a small amount of interest while keeping your money in a checking account. You can withdraw the cash at any time and have cash in hand instantly.
Savings or High-Yield Savings Accounts
Most savings and definitely high-yield savings accounts pay interest on your deposits. You invest your money, loaning it to the bank, but can withdraw/liquidate your investment at any time.
Money Market Accounts
Money market accounts are like a cross between a savings and checking account. They have minimum deposit requirements (usually higher than other accounts) and pay higher APYs. You can write checks against the account and withdraw funds whenever you need them.
You can buy bonds, both government and corporate) on the open market. Bonds are ‘loans’ to the government or corporations. In exchange for the money, the issuer promises to repay the debt with interest.
They are liquid because you can sell them on the open market at any time at their current value.
Stocks are also liquid because you can buy and sell them at any time during market hours. If you buy shares today and then sell them tomorrow, you’d receive the value of the stock at the time you sell it.
Mutual Funds and ETFs
Both mutual funds and ETFs are baskets of securities. They are diversified portfolios that you invest in with other investors. Mutual funds are slightly less liquid than ETFs only because you can only sell them after the market closes, but ETFs you can trade during open market hours.
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What Investments Aren’t Liquid?
Any investment you cannot turn to cash almost instantly, is illiquid. Real estate, cars, and collectible art pieces are examples of illiquid investments. You can invest in them but cannot turn them into cash quickly. Real estate, especially, could take months to turn into cash.
Liquid Investments FAQ
What is the most liquid investment?
Cash is the most liquid investment. You can use it right away and don’t have to wait for a buyer to convert it for you.
How much money should you have in liquid investments?
Ideally, you should have 3 to 6 months of your monthly expenses in liquid investment. If you lost your job or fell ill, you should have enough money to get you through 3 to 6 months without any stress.
Is a house a liquid asset?
A house isn’t liquid because it has your money tied up for months or even years. While you can find a seller (sometimes quickly), it takes 45 days just to close on the sale and that’s if you find a buyer immediately.
What types of real estate investments are liquid?
If you invest in real estate via stocks or ETFs, it’s a liquid investment. You can sell the investment on the open market at any time, which means you can turn it into cash quickly. A house or even a Real Estate Investment Trust requires more time, which means less liquidity.
Is gold a liquid asset?
Yes, silver and gold are both very liquid. You can sell them instantly, turning them into cash.
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Should You Have Liquid Assets?
Everyone should have liquid assets, but there’s such a thing as too much of a good thing. Carrying too much cash, for example, may help you have liquidity, but won’t earn you any gains.
If there’s no risk, there’s no gain. If you want your money to grow, it’s important to find the balance between liquid investments and somewhat liquid assets to grow your money and plan for the future.