Differences of Liquid vs. Non-Liquid Assets

Liquidity refers to how quickly an asset can be converted into cash without drastically affecting its value. It could also be considered a measure of how easy something is to sell for cash, although how readily an asset can be used to secure a loan can also be seen as affecting its liquidity. Liquidity exists on a spectrum, with some assets generally regarded as liquid and others regarded as non-liquid or, using another common financial term, illiquid. Cash is considered the most liquid asset as it can be accessed easily. An asset such as a house, on the  other hand, is non-liquid, as it would take considerable time and effort to convert the property into cash.

If you need help putting a financial plan together, a financial advisor can work with you to reach your goals.

What Are Liquid Assets?

Liquid assets are those that can be quickly and easily converted into cash with little to no loss in value. Since they can be accessed immediately, they're central to maintaining financial flexibility. Liquid assets are the ones available to manage unexpected expenses, meet financial obligations or take advantage of investment opportunities. Examples of liquid assets include:

• Cash . Always readily available, cash is the most liquid asset.
• Checking and savings accounts . With just a transfer or withdrawal, you can usually access either of these accounts quickly and easily.
• Stocks and bonds . You can usually sell these and other securities on the open market with minimal delay, though there is the risk of taking a loss on your initial investment.
• Money market funds . These funds have liquidity similar to savings accounts, but may offer slightly higher returns.
• Certificates of deposit (CDs) . Depending on the terms, some CDs can be liquidated before maturity, although early withdrawal penalties may limit their liquidity.

What Are Non-Liquid Assets?

Unlike liquid assets, non-liquid assets cannot be quickly and inexpensively converted into cash. Investors usually hold non-liquid assets for long-term investment purposes, such as price appreciation or income generation. While these assets serve important purposes in investing, they hamper short-term flexibility.

Selling non-liquid assets often requires significant time and effort, making them ill-suited  for covering immediate financial needs. When these assets are converted into cash, there's also often potential for significant upfront costs and even loss of initial investment. The following are examples of non-liquid assets:

• Real estate . It often takes weeks or months to close a sale on a residential or commercial property. Getting it ready for listing could also require you to make costly repairs or upgrades to the property.
• Retirement accounts . You generally can't access funds in IRA, 401(k) and similar accounts before retirement age without paying a penalty.
• Private equity . Ownership shares in privately held companies are often tied up for extended periods of time. In order to liquidate, specific conditions may also be required.
• Collectibles. Turning art, jewelry and similar assets into cash may take time and often require specialized markets or auctions.
• Business interests . Ownership in a business is not easily sold and finding a buyer can be a lengthy process.

Liquid vs. Non-Liquid Assets

Both liquid and non-liquid assets of various types can fill specific roles in your investment portfolio. Knowing their differences, as well as when and how to use each one, can help improve your financial planning.

Why Liquidity Is Important

Understanding liquidity and the role that it plays in your investment portfolio and financial or retirement plan can not only help you manage your finances, but also your risk.

For instance, by maintaining a portion of your portfolio in liquid assets, you reduce the chance you will have to sell non-liquid assets during market downturns to raise cash. Selling during a slump could lead to financial losses in the short term and potentially missing out on gains in the long term.

Non-liquid assets, however, may generate higher long-term returns. For this reason, it is often advisable to maintain a balance between liquid vs. non-liquid assets. This can help you achieve your financial goals, such as buying a home, paying for education or preparing for retirement, while also being ready for the unexpected.

Bottom Line

Liquid assets provide the flexibility and security needed to handle day-to-day expenses and unexpected events, while non-liquid assets offer the potential for long-term growth and income. Balancing liquid vs. non-liquid assets in your investment portfolio is an important part of not only managing your current finances, but also preparing for your financial future.

Tips for Financial Planning

• A financial advisor can help you create a personalized plan to reach specific goals. Finding a financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now .
• SmartAsset's asset allocation calculator can help you design a portfolio that suits your personal risk profile.

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