What is a Liquid Investment? 8 Best Liquid Investments

Having some of your money saved in a liquid investment can be a safer alternative than having all of your cash tied up in the stock market or real estate.

Liquid investments are a safer way to save for emergencies. They’re also a great option if you have a short-term savings goal like saving up to buy a new car or for a downpayment on a house. 

Still, there are several different kinds of liquid investments, so let’s explore what they are and how they work.

What are liquid investments? 8 types of liquid investment

What is a liquid investment?

A liquid investment is an investment that you can easily convert to cash without experiencing a significant impact. Low impact means that it won’t take much time or energy to convert your assets to cash. 

Liquid assets or investments are generally safer ways to invest your money so you can still access them quickly. That makes them a good option for your emergency fund or short-term savings account. 

For example, if you’re planning to buy a house soon, you need a way to save up for a downpayment without taking on too much risk. You don’t want to lose money on your investment, and you want to be able to access your savings as soon as you find the perfect house.

But there is a downside to some liquid investments: they typically yield lower returns. Cash, for example, is highly liquid. But saving only cash will never net the kind of return you could gain from investing in the stock market.

How are liquid assets different from other assets?

It’s all about how quickly you can convert your investment to cash and whether or not you’ll experience some kind of loss during the conversion process.

Let’s look at two different kinds of assets to see the difference:

• Your savings account: Retains the same value, possibly even earns a little interet. There are low barriers to pulling cash out of your savings account — a quick trip to the bank, or you can probably log into your banking app and move money to your checking account.
• Your car: Cars are depreciating assets (unless it’s a collectible car). You paid $X for your car, but it will never be worth as much as it was the day you bought it. Not only that, if you want to sell your car for cash, it takes time to list it for sale and meet with potential buyers. The whole process could take days or weeks.

The difference between liquid and non-liquid investments is extremely important if you’re trying to save up for anything. Having all of your money tied up in illiquid assets can put you in a tight spot if you need cash quickly.

Now that you understand what liquid investments are and how they’re different from illiquid ones, let’s look at the best kinds of liquid investments.

8 types of liquid investments

1. Cash

What is the most liquid asset?  It’s cash. Having cash on hand is by far the most liquid investment.

You don’t have to sell cash to use it. There’s no penalty for pulling cash out of your wallet. Cash is ready to spend.

I use my credit cards for pretty much everything these days, but I always keep some cash at home just in case. And yes, I pay my balance off every month — I use credit cards to earn travel rewards.

There are a couple of downsides to having too much invested in cash. The most obvious is that you’re never going to make anything back on it. The next is that it can be tempting to spend cash, and you may run the risk of draining your cash savings if you’re not careful.

But one of the biggest downsides is because of inflation. Say you stick $100 in your sock drawer today. In ten years, that $100 won’t be worth as much because inflation averages 2.25% annually. 

2. Checking account

Your checking account is practically the same as having cash in the bank because it’s so easy to access. You can use your debit card to make purchases, write checks, and easily withdraw cash from an ATM.

Your average checking account won’t pay any interest, but a small number of banks do offer interest-bearing checking accounts. 

3. High-interest rate savings account

Traditional savings accounts are a little less liquid than checking accounts because they typically limit you to a certain number of withdrawals or transfers each month. You can still access your money if you go over those limits, but you’ll have to pay a small fee. 

Savings accounts also don’t traditionally have check writing or ATM privileges, making it just a little harder to access your funds.

Most savings accounts have low interest rates — 0.01% is the national average. 

You can find slightly higher APYs with online banks because they have lower overhead costs when compared to brick and mortar banks. Credit unions sometimes offer higher interest rates, too.

My favorite high-yield savings account is with Chime | Banking. Chime savings accounts have variable rates that currently pay 0.50% APY. In addition, there are no account minimums to open an account, it’s FDIC-insured, and there are $0 fees.

Open a savings account with Chime | Banking

Chime is a financial technology company, not a bank. Banking services provided by The Bancorp Bank or Stride Bank, N.A.; Members FDIC.

4. Money market accounts

Money market accounts are almost like a cross between a checking and savings account, but you can generally earn a higher APY on them. 

Most money market accounts have some check writing and ATM privileges, but the Federal Reserve limits these accounts to six withdrawals per month.

Another trait of money market accounts is that your APY is dependent on the amount of money in the account. There may also be fees if your balance dips below a certain amount.

5. Certificates of deposit

Certificates of deposit (CDs) are financial assets you can find at your bank, and they generally have a higher rate of return than savings accounts or money market accounts. 

CDs have a higher rate of return because you agree to hold your money in that account for a set amount of time, and generally, the longer the CD, the higher the return rate. CDs can be for weeks, months, or years.

Once that period is over, your CD has reached maturity, meaning you can exchange it for cash — the principal plus the earned interest. 

Certificates of deposit are safe liquid investments because the FDIC backs them, so there’s no risk of losing money as long as you wait to cash out until the CD has matured. The trade-off is that you run the risk of losing out on a better rate somewhere else.

6. Bonds

Bonds work as a kind of loan. For example, when a company or government needs funds, they may issue a bond to finance the loan. The bond gives them a certain amount of money they need to pay back in full on a certain date. In the meantime, the company pays the investors interest.

There are several different kinds of bonds: government, municipal, corporate, and mortgage. Government bonds are considered the safest kind of bonds, while corporate bonds are the riskiest.

Still, corporate bonds are a little less volatile than buying company stocks because they’re loans. 

You’re technically lending money, and the company or governments make payments in the form of bond coupons. Coupons are the annual interest rate paid on the bonds, and it’s usually paid out biannually.

You can determine the risk of a bond by checking its ratings through rating agencies like Standard & Poor’s, Moody’s, or Fitch. These agencies estimate creditworthiness and assign grades, with AAA being the highest.

Bonds are liquid assets because you can buy and sell them relatively easily without losing much of the value you put into the investment.

And like other tradable market assets, you can purchase bonds through investment brokerages, ETFs (exchange-traded funds), or directly from the U.S. government. 

Buying directly from the U.S. Treasury’s website, treasurydirect.gov, cuts out the middleman so you don’t have to pay brokerage fees.

One interesting thing about bonds is that they often lose value as interest rates climb—something worth considering in terms of liquidity.

Learn more at Investing for Beginners — Your Guide to Start Investing.

7. ETFs

ETFs are exchange-traded funds. These are funds that track a market rather than shares of a company or companies. This means they’re passively managed instead of actively managed, like a mutual fund.

They are inherently diverse, making them less risky than stocks, and have lower fees than mutual funds — why they’re becoming more popular for investors.

You can buy and sell ETFs during open market trading hours, making them a fairly liquid investment in terms of accessibility. 

There are still fees associated with ETFs, and you’ll want to pay attention to those when you’re purchasing these investments. ETFs are less volatile than stocks, but there is still risk associated with them. 

M1 Finance is one of my favorite places to start trading ETFs (and stocks, which I’ll explain next). They charge $0 trading commissions and $0 monthly management fees. Learn more in my M1 Finance Review.

Invest in ETFs with M1 Finance

8. Stocks

Stocks are shares of a company that you can buy and sell, and they’re the most volatile kind of investment on this list. That’s more risk for you as an investor because the amount you’ve invested can fluctuate dramatically in just a few minutes.

With a diversified portfolio, stocks can be a good long-term investment, but keeping your emergency savings invested in stocks alone isn’t a smart idea.

Stocks are less liquid than other investments because the process of selling stocks requires that you go through a brokerage, and you may lose money on your investment. And if you make money on the sale of your stocks, you’ll have to pay taxes on any gains you make from the sale of your stocks. A financial advisor or good robo-advisor can help you offset your gains, but it’s still worth mentioning.

I highly recommend Webull if you’re interested in investing in the stock market. They have an incredibly robust trading platform for active traders, and there are $0 commission on stock trades. Learn more in my full Webull review.

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The final word on liquid investments

If you’re thinking about your emergency fund or want to save for a near-term purchase, you want to save your money somewhere that’s easy to access and has a low risk. 

A high-yield savings account through Chime is one of the best places for that kind of savings because they have a $0 account minimum, and you can earn 0.50% APY on your savings.

The key is to think about how quickly you need your cash and the barriers to accessing it. More barriers and the chance that you’ll lose money on your investment means it’s less liquid.