Equity, adjusted gross income, stocks, bonds, current ratio, operating cash flow, assets, liabilities, net worth -- it's easy to get lost in the jungle of financial terms out there when you're trying to manage finances. Whatever happened to just measuring income and expenses? Well, when you ask yourself "how much am I worth?" it's not just a question of how much money you have in your wallet, or even your bank account, at that moment. It turns out that, depending on how and when you invest, spend or save your money, your worth varies. Liquid assets make up just one special category of your worth. Understanding it will help you get a better idea of your own financial situation.
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Liquid assets are your valuables that can flow easily from one hand to another without any wear and tear along the way.
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Let's break it down. First, an asset is something of value that you own -- anything from cash to a Rolling Stones CD to your home. The term liquid doesn't literally refer to the wine in your cellar or the gas in your tank. In this sense, liquid is metaphorical: it's not solid and hard to move, but fluid and flows easily. Specifically, liquid assets are those that you can easily and efficiently exchange for another asset or good. Cash is the classic example. To qualify as liquid, you must be able to sell the asset quickly without a loss of value. For instance, you could sell your house tomorrow on eBay, but such a fast transaction would mean you'd end up selling it for much less than it's worth. Houses and other assets that would take a longer time to sell for a fair market price aren't liquid, but rather fixed assets (or illiquid assets).
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If you pick up the business section of the newspaper, you may see the term liquidity thrown around describing a corporation's finances. Although liquid assets are used slightly differently in the business world, the same basic principles apply. A corporation's liquidity is a measure of how well it can meet its obligations. If it has a high liquidity, it can easily access cash (or sell assets for cash) that will satisfy its debts.
In the next few pages, we'll take a look at the role of liquid assets in both personal finance and business. First, we'll discuss why it's important to know -- and how to find out -- your own state of liquidity.
