The liquidity of an asset denotes how quickly you can turn it into cash. It may sound complicated but is quite easy, and these assets are especially useful for people who want to get a mortgage and eventually own their own home. The liquidity of an asset depends on how fast you can move it from an account into hard cash. Just as a liquid moves freely and without any difficulty, liquid assets like an investment portfolio can be converted into hard cash easily.

These types of liquid assets are crucial components of your financial profile and have multiple benefits:

1. What is a liquid asset?

Liquid assets are those that can be easily converted into cash, and these types include the following:

• Certain investments
• Cash
• Savings accounts and checking accounts

2. Net worth

Your net worth is determined by the assets you hold, liquid or otherwise, minus your liabilities and debt. While your net worth may be high, your liquid assets will need to be determined so that you can gauge how much cash you would have on hand if you find yourself in a tough spot. It is also important to know the types of assets that are not liquid as they generally take time to liquidate and often lose value in the process as well. These types of assets include the following:

• Real estate
• Jewelry
• Automobiles

3. Liquidity

Liquidity is not precise and cannot be an exact number. It may vary and fluctuate depending on certain market conditions, and it should be looked at as a scale. Cash is already in its most liquid form, while you are required to take a few steps before stocks can be converted into cash, making them less liquid.

4. Investments that are considered liquid

People might be confused about which assets can be considered liquid. We have established that all investments are not liquid as they could be tied up for years with a lock-in period, and the investment could lose value if you try to withdraw early. Some investments that are regarded as good types of liquid assets include those listed:

• Bonds
• Mutual funds
• Money market funds
• Stocks

5. Investment properties

Investment properties are not liquid as they take time to liquidate and lose value if you try to do so quickly. Some certificates of deposit, or CDs, may be slightly liquid but have steep penalties for premature withdrawal. You must look at the fine print as some specialty accounts may have lower or no penalties for early withdrawal.

Some types of retirement accounts cannot be considered liquid as the account holders may incur significant losses if they try to withdraw all their money. It should be noted that there are hardship withdrawals that allow people to withdraw their money if they are desperately in need. You should try to find out the specific fine print on any early penalties and whether the account allows for hardship withdrawals.