general
Liquidity
Liquidity refers to how quickly and easily an asset can be converted to cash without significantly affecting its price. Cash is perfectly liquid; real estate is illiquid.
Liquid assets include cash, money market funds, and publicly traded stocks and bonds. Semi-liquid assets include CDs with early withdrawal penalties. Illiquid assets include real estate, private equity, and collectibles.
Liquidity matters for emergency funds — you need assets you can access in days, not months. Illiquid investments typically offer higher returns to compensate investors for the inconvenience of not being able to exit quickly.
Related terms
- Emergency Fund
- An emergency fund is a savings buffer covering 3–6 months of essential living expenses, held in liquid, low-risk accounts. It protects against job loss, medical emergencies, and unexpected large expenses.
- Net Worth
- Net worth is the total value of everything you own (assets) minus everything you owe (liabilities). It is the most comprehensive single-number measure of financial health.
- Compound Interest
- Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods. It causes savings and investments to grow exponentially over time.
Frequently asked questions
What is Liquidity?
Liquidity refers to how quickly and easily an asset can be converted to cash without significantly affecting its price. Cash is perfectly liquid; real estate is illiquid.