What are liquid assets?
A liquid asset is anything you own that can be instantly converted into cash without losing its value. Anyone who has ever lost a job or run into medical bills they couldn’t pay can attest that liquid cash is important to remaining financially solvent.
Not every asset you own can be categorized as a liquid asset. The basis of a liquid asset is that it can be converted into cash without losing value. While non-liquid items can be sold, they may lose a portion of their value if they are sold too quickly. These assets can benefit you in the long run but are not considered liquid:
- Real estate
- Recreational vehicles
- Stamp collections
- Sports memorabilia
- Musical instruments
A 401(k) retirement account is considered liquid once you have reached retirement age. You can withdraw cash after retirement age without facing any IRS early withdrawal penalties. If you are younger than 59 ½ years old, you will face a 10 percent early withdrawal penalty. If you funded your plan with pretax dollars, you will have to pay income tax on the monies withdrawn. There is an exception for those 55 or older who are facing unexpected financial hardship, such as job loss or medical expenses. If you are still working, these monies are normally paid back into your 401(k), making the withdrawal a loan rather than a liquidation.
A 457(b) retirement plan also allows for a hardship withdrawal in the event you experience an unforeseeable emergency. The caveats are that you must not have any other way to cover the expense and you may withdraw only as much money as you need to remedy the situation. These hardships include sudden illness or loss of property due to a catastrophe.
The amount of liquid assets you should have depends on a number of factors, including how much your monthly expenses are. Most financial advisers recommend having enough liquid assets to support your family and yourself for six months. If that is not feasible, work toward putting one or two months’ worth of expenses where they can be easily accessed.
You should also determine how much risk you are willing to live with. For example, following the Sept. 11, 2001, terrorist attacks, the American financial system was shuttered for four days. Because stock exchanges were closed, investors who had thought their investments would be easy to liquidate found that they were not guaranteed the ability to sell anything.
Examples of liquid assets include:
- Cash on hand.
- Monies in a checking account.
- Monies in a savings account.
- Government bonds.
- Funds in a money market account.
- Mutual funds.
- Tax refunds.
- Court settlements.
- Certificates of deposit.
- Monies in a trust fund.