Many people equate the term assets with affluent individuals who have many residences or enormous stock holdings. However, regardless of your financial situation, you most certainly have valuable items. These items are your assets. Many valuable assets can get owned by an individual. However, cash is still king, as the saying goes. Individuals can make billions of dollars in revenue, but he will suffer if he fails to create liquid capital. A person may own several homes or valuable artwork, but he will rely on liquid assets to keep him afloat amid a financial disaster.
An asset is something that has monetary worth to a company or individual. Liquid assets are assets that are traded for legal money simply, safely, and rapidly. Inventory accounts receivable and stocks are some examples of liquid assets. Liquidity, or your company’s capacity to swiftly turn assets into cash, is critical on numerous fronts. These resources can assist you in dealing with financial difficulties, obtaining credit, and settling responsibilities on short notice. Thus, firms must have a mix of liquid and non-liquid assets.
So, what are liquid assets?
Assume your vehicle broke down today. Do you have any ideas where you’d receive the money for the repairs? What is the point here, you ask? You must have a strategy in place if — or when — the unexpected occurs. When the unexpected happens, you’ll need a cash cushion to weaken the blow. And how do you do that? Through liquid assets. It is where liquid assets come in handy. But what exactly are liquid assets? What distinguishes them from fixed assets? Learning the fundamentals can assist you in developing a financial strategy.
A liquid asset can be drained more readily than a fixed asset, just as a liquid gets drained more easily than a solid. Anything that can get quickly turned into cash is considered a liquid asset. Money is said to be liquid if it can be accessed quickly and with little risk. You can use your savings account to pay for a home repair without incurring a penalty, as you would with an investment account.
Cash and other assets that can be converted into cash quickly and without loss of value are examples of liquid assets. Some of your assets should always be liquid to meet living expenditures and unforeseen crises. However, consider liquidity in a broader sense as a spectrum: Some assets get more easily converted into cash than others. Illiquid assets are at the other extreme of the scale and are difficult to appraise and sell for cash.
What are examples of liquid assets?
Now we’ll delve a little deeper: In the corporate world, what exactly are liquid assets?
- Cash: The highest liquid asset is cash. Aside from real money and ATM withdrawals, cash can get accessed through your bank account and peer-to-peer payment apps.
- Deposit certificate (CDs): CDs provide larger annual percentage yields than checking or savings accounts but have stricter withdrawal limitations. To withdraw funds from a CD before the maturity date, you may have to pay a penalty of a few months’ interest. No-penalty CDs are an exception, earning lower APYs.
- Bonds. Some bondholders purchase bonds and retain them until they mature. However, because the secondary market for trading bonds is so large, many are very liquid assets. Bonds, like any other security, may be worth less than you bought for them.
- ETFs: ETFs are short for exchange-traded funds (ETFs). ETFs are investment funds that trade on public markets the same way as stocks do, making them relatively straightforward to sell. While ETFs are less hazardous than individual stocks and bonds, you may have to sell them at a loss if you need your money fast. In most cases, you will get paid within a few days.
- Money market mutual funds: Money market funds are mutual funds that solely invest in highly liquid assets such as cash, CDs, and government-backed debt. Their value is steady because their constituents are highly liquid. The profits from a sale are usually received the next business day, much like with mutual funds.
- Precious metals: Precious metals can exist in two states: liquid and illiquid. Gold and silver coins can be used as money in some states, making them theoretically as liquid as cash. Dealers can also trade precious metals for cash.
But how do I calculate the liquid assets formula?
Individuals must understand their liquid net worth to meet unforeseen costs.
Lenders will also look at your liquid net worth to determine whether or not to give you money. According to Cornerstone Mortgage, having a liquid net worth implies you’re more likely to be able to repay them.
You must apply the following calculation to determine your liquid net worth:
Total Liquid Assets – Total Debts (Liabilities) = Liquid Net Worth
Total liquid assets include all of your assets like cash in your checking account and accounts receivable. Total liabilities include debts like credit card debt, mortgage debt, and unsecured loans (not protected by a guarantor).
So, what are fixed assets then?
Fixed assets are also known as permanent or illiquid assets. Fixed assets are excellent for accumulating wealth, but converting them to cash takes time. And, if you’re in a financial bind, hastening the procedure might be pricey. Fixed assets may take months to recoup their monetary value after being sold. Land and structures have the lowest liquidity of any non-liquid asset class.
A jewelry store, for example, is having financial difficulties. To meet debts, she chooses to liquidate the actual store and exclusively sell online. However, she must sell the house, locate a buyer, and complete all necessary paperwork. But, her bills are well overdue at that point.
What are examples of fixed assets?
Let us now try to see what exactly falls under the fixed assets category.
- Real Estate: Selling real estate can take weeks, months, or even years. While you may use a home equity loan, home equity line of credit, or a reverse mortgage to access the equity you’ve built up in your home or investment property, setting up these arrangements takes time and work.
Also, read 5 Factors To Help You Determine The Liquidity Of Your Real Estate Investments.
- Collectibles. Antiques, artwork, baseball cards, jewelry, and other collectibles are examples of items that might be difficult to value and sell.
- Stock options: Many organizations, and digital start-ups, provide stock options to their workers as part of a remuneration package. Shares options can be lucrative, but they are highly illiquid assets since you must work for the firm for years before the stock gets guaranteed to you.
- Priva equity: If you can invest in private equity assets such as venture capital or funds of funds, you have the opportunity to make large profits. However, private equity funds sometimes impose stringent limits on when you may sell your shares.
- Intangible assets: Intangible assets are thoughts or ideas with value—sometimes a lot of worth. Corporate goodwill, brand recognition, intellectual property, and reputation are examples of intangible assets. However, intangible assets can be tough to assign a market value because they are by definition exceedingly illiquid.
Having an adequate supply of liquid assets is a critical component of maintaining a healthy financial profile. We cannot always predict adversity, such as losing a job or contracting a crippling sickness. Having cash on hand in the case of a financial crisis will make it easier to go through and provide you with some peace of mind.
Furthermore, increasing your liquid assets not only benefits your general financial well-being but may also pave the road for possible homeownership. Lenders may also assess your assets as part of your mortgage application and want to know if you have financial reserves accessible.
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