Liquidity
Liquidity measures how quickly and easily an asset can be converted into available cash without losing significant value in the process.
The liquidity of an asset shows how easy and fast it is to convert it into cash without having to lower its price much to find a buyer. Cash in a checking account is the most liquid asset possible (it's already available money, instantly); at the other end, real estate is a highly illiquid asset, since selling it quickly usually requires lowering the price, and the process can take months. In between there are many degrees: a term deposit before maturity, listed shares, or an investment fund each have different levels of liquidity and different costs (penalties, fees, or simply the risk of selling at a bad time) for accessing the money earlier than planned.
Liquidity is key when deciding where to keep an emergency fund: that money should sit in highly liquid assets (a high-yield savings account, a penalty-free deposit) precisely because it may be needed without warning, even if that means giving up the somewhat higher return of less liquid products.
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Frequently asked questions
What does it mean for an asset to be liquid?
That it can be converted into cash quickly and without losing significant value in the process. Money in a checking account is the example of maximum liquidity.
Why should an emergency fund be kept in liquid assets?
Because it may be needed at any time without warning; keeping it in an illiquid asset (like real estate or an investment with a redemption penalty) could force you to sell at a bad time or at an unfavorable price.
Is low liquidity always a bad thing?
Not necessarily: less liquid assets (real estate, certain funds) usually compensate for that lower liquidity with a higher potential return, as long as the money invested won't be needed in the short term.