Short Answer: Liquid, non-liquid, illiquid — too much financial jargon? The fundamental difference between liquid and non-liquid (or “illiquid”) assets is how quickly they convert to cash. Liquid assets include things like certificates of deposit, stocks, and the funds in your bank account, while non-liquid assets include real estate, collectibles, and retirement accounts. When financial planning, it’s important to keep some of your assets liquid, while non-liquid assets can contribute to your overall net worth. Below, we detail the differences between liquid and non-liquid assets and provide more examples of each.
What Is a Liquid Asset?
A liquid asset is either cash or an asset that can be converted to cash quickly and without affecting its value. In other words, liquid assets include cash and short-term investments that can be easily converted to cash.
Besides your savings and checking accounts, certificates of deposit (CDs) are also considered liquid or cash. While there is a withdrawal fee for closing a CD before it matures, the fee is minimal, and if you’ve had the CD for at least a few months, the fee will usually be less than what the account has earned in interest. In fact, withdrawal fees are usually calculated in months interest — a bank might charge you three months interest for closing a five-year CD less than a year after you’ve opened it, for example.
Examples of Liquid Assets
Here’s a more in-depth look at which of your assets are considered liquid.
This one’s pretty obvious — cash is the most basic liquid asset. You don’t have to do anything special to access it; it’s ready to spend. On the other hand, it’s also easily stolen and probably not safe to keep too much on hand.
2. Money in a Checking or Savings Account
Funds on deposit in a bank account are the next most liquid asset. This includes incoming deposits (like paychecks or tax refunds) and accumulated wages, as well as trust funds. The money is easily accessible: If it’s a checking account, you can spend it easily using a check or debit card. With either a checking or savings account, you can withdraw cash at many convenient locations if you have an ATM card. Even if you need a larger amount — more than the ATM maximum, for example — you can still go to the bank to withdraw your money on demand. The only limiting factor in that scenario would be the hours the bank is open for business.
At the same time, money deposited into a bank account is safer than cash lying around the house. It’s much more difficult to steal and generally is insured by the FDIC up to $250,000. So this type of liquid asset is almost as available as cash and much more secure.
3. Certificates of Deposit
A certificate of deposit, or CD, is a type of investment where an amount of money is deposited and earns interest over a set period of time, until its maturity date. A CD is less liquid than a checking or savings account because the money cannot be withdrawn before the maturity date without incurring a penalty. On the other hand, a CD earns interest at a higher rate than what would be earned in a regular savings account. For example, you might receive an annual percentage yield (APY) of 0.1% for a regular savings account but receive an APY of 0.75% to 2.75% if you deposit the same money into a CD account.
Most CDs obtained at banks are federally insured up to $250,000.
A CD is still a liquid asset because if you had to withdraw it before the maturity date, you could do so in a relatively short period of time and for most CDs, without a large enough change in value to alter its status as a liquid asset. Depending on the specific CD, you would likely either forfeit interest earned or be required to pay a penalty fee.
Stocks, another liquid asset example, are shares of ownership of a corporation. Stocks vary widely in risk and potential for growth. In general, large, stable companies are less risky but offer less potential for growth, while smaller, fast-growing companies have more potential for growth and accompanying greater risk. Overall stocks are one of the riskiest liquid assets to own because there is no guarantee. While you could potentially make a lot of money, you could also potentially lose it all.
The liquidity level of stocks will vary depending on the specific stock. Stocks with a high trade volume will generally be more liquid than less-traded stocks since they can more easily be sold and with less variability in price.
Bonds are another type of investment asset, but they are more predictable and carry less risk than stocks. Bond holders receive coupon payments for interest earned at specified points between issuance and maturity and then a specified sum at the maturity date.
There are several different types of bonds. Government bonds, such as U.S. Treasuries, have the lowest risk; U.S. Treasuries are guaranteed by the U.S. government. The different types of U.S. Treasuries have different amounts of time to maturity and different interest rates. Corporate bonds, as the name suggests, are issued by companies rather than the government. Corporate bonds vary in risk from high quality to junk bonds. The bonds with the most risk generally have the highest yield and vice versa.
Bonds can be sold through a broker before the maturity date if the funds are needed. How selling before maturity affects the amount of cash received depends on the bond, interest rates, and brokerage fees.
6. Mutual Funds
Mutual funds use the pool of money from all investors to invest in a diverse portfolio of assets, including stocks, bonds, and real estate. When you invest in a mutual fund, you get the benefit of diversity of assets and professional investing in exchange for a fee. Mutual funds are liquid assets because the investor can redeem the shares at any time. Because the mutual fund has up to seven days to pay out the cash, mutual fund investments are less liquid than funds in a bank account.
7. Money Market Funds
A money market fund is a particular type of mutual fund. Money market funds invest in securities with minimal risks, such as the U.S. Treasury. They are known to have low volatility and generate a consistent income, which is sometimes even tax-exempt. Assets from money market funds are generally available the next business day for retrieval or trade, making them more liquid than other mutual funds.
8. Accounts Receivable
If you own a business or are an entrepreneur, you may have accounts receivable — or money owed to you buy your customers. Customer balances qualify as accounts receivable if you’ve already delivered the goods or services, but have not yet collected the cash. Accounts receivable are considered liquid due to the expectation that the customer will pay the amount in the relatively near future.
9. Promissory Notes
A promissory note is a written, signed record stating that a person will pay a particular sum to another. Promissory notes sometimes include a specified date on which the sum should be paid, but may also detail a repayment plan rather than a lump sum, or may state that the payment is due on demand. Like accounts receivable, promissory notes are considered liquid because, as the lender, you will soon receive the cash sum.
What Are Non-Liquid Assets?
In contrast to liquid assets, non-liquid (also known as “illiquid” assets) assets cannot be easily converted to available cash. Often, it takes time to find a buyer for these types of assets. Assets which can be converted to cash quickly but lose a substantial portion of their value in the process are also non-liquid.
Examples of Non-Liquid Assets
1. Real Estate
Real estate is one of the least liquid of assets. If you own a piece of real estate and need to sell it for cash, several steps are required. These include finding a buyer and completing the legal process to transfer. You will likely also pay commission and other expenses. Selling real estate would not be a quick way to solve a financial problem.
2. Retirement Accounts
Retirement accounts generally are not considered to be liquid assets because although you could cash them out if needed, the value would be greatly reduced. For example, if you decide to cash out your 401(k), you will have to pay income tax on the amount cashed out (in fact, 20% will be withheld by the plan administrator) plus a 10% penalty for early withdrawal. The loss of value makes the account non-liquid.
The same account might be considered a liquid asset; however, if the account owner is at least 59 ½ since he or she would no longer be subject to the penalty.
There is a wide range of valuable items that might be considered assets, from baseball cards to antiques to electronics to jewelry. However, the majority of these types of items would be considered non-liquid assets because they are not readily converted to cash. When they are, it is often at a reduced amount. You might be able to sell your used clothing instantly at the local resale store, for example, but it is likely for pennies on the dollar. Higher value items require finding a willing buyer and maybe even a lengthy process including an appraisal, making these assets non-liquid.
It’s important to have liquid assets in case you need to make a large purchase or incur a large bill without warning. Liquid assets are cash or near cash — and include accounts that can be quickly converted to cash without much change to their face value. Assets that are difficult or take time to convert to cash, like real property, are considered non-liquid or illiquid assets. While these might increase your over all net worth by quite a bit, you can’t use them to pay for something today, tomorrow, or even next week.