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 ways to keep cash on hand
What is a liquid investment?
A liquid investment is an investment that you can easily convert to cash without experiencing a significant impact. By low impact, I mean it doesn’t take a lot of 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.
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: your savings account and. your car.
Your savings account will retain the same value, possibly even earn a little interest. There are very low barriers to pulling cash out of your savings account. It’s a quick trip to the bank, or you can probably log into your banking app and move money to your checking account.
Your car, though, is a depreciating asset. 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 non-liquid investments can put you in a tight spot if you need cash quickly.
The downside to some liquid investments is that they typically yield lower returns. Cash, for example, is extremely liquid. But saving cash only will never net the kind of return you could gain from investing in the stock market.
Now that you understand what liquid assets are and how they’re different, let’s look at the best kinds of liquid investments.
8 Most Liquid Investments
What is the most liquid asset? Cash in your hand is by far the most liquid investment.
You don’t have to sell cash to use it. It’s 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.
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.
Checking accounts aren’t known for having high-interest rates, and many don’t earn you any interest at all. However, some banks do offer checking accounts with low-interest rates, and you can usually find a sign-up bonus when you open a new checking account.
Here’s an example of an offer from Chase:
3. High-interest rate savings account
Traditional savings accounts are a little less liquid than checking accounts because there are most likely limits to the number of withdrawals or transfers. 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 very low-interest rates – 0.01% is the national average.
You can find slightly higher APYs with an online bank because they have lower overhead costs when compared to brick and mortar banks. Credit unions sometimes offer higher interest rates, too.
4. Money market accounts
Money market accounts are almost like a cross between a checking and savings account, but you can earn a higher APY on them.
Most money market accounts have some check writing and ATM privileges, but the Federal Reserve limits them 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, or 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’re agreeing 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 time period is over, your CD has reached maturity, meaning you can then exchange it for cash, which is the principal plus the earned interest.
Certificates of deposit are safe liquid investments because they’re backed by the FDIC, so there’s no risk of losing money as long as you wait until the CD has matured to cash out. The trade-off is that you run the risk of losing out on a better rate somewhere else.
Bonds work as a kind of loan. 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 which 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 makes 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.
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 – this is 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.
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 really good long-term investment, but keeping your emergency savings invested in stocks alone isn’t a very smart idea.
If you have to quickly sell your stocks, you either run the risk of losing money, or 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.
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 very low risk.
A high-yield savings account or money market account are two of the best liquid investments for that kind of savings. There’s very low risk and you can earn some interest on your savings.
No. Homes, land, and other kinds of real estate are not considered liquid investments because it can take weeks or months to sell real estate and have the cash in your hand.
Real estate may be a good investment in some markets, but there’s also the risk that the property will decrease in value and not be worth as much as you purchased it for.
No. Cars are depreciating assets, meaning you will never make your money back on them. And if you needed cash quickly, it would take time to list and sell your vehicle.
Mostly yes, but it depends on which kind of liquid investment you’re talking about and what your goals are. If you want a safe place for short-term savings, then cash, a high-yield savings account, or a money market account is the safest bet.
Securities like bonds, ETFs, and stocks are better long-term investments because you can weather normal market volatility much better than someone who needs access to those funds in just a few months.