Money secret No. 9: Cash is Queen: Know the liquidity of your investments

Liquidity is an important financial concept. It essentially tells you how “fluidly” you can convert an investment into cash. The most liquid asset possible is cash. If you have all of your money in cash, you have exclusively liquid resources. You can use this money right away to buy anything you want to, such as to have on hand for an emergency or to take off on vacation – whatever you want to use the money on. Cash doesn’t just consist of paper bills and coins – the money in your bank account, which you can access at any time, counts too.

Every investment has a different amount of liquidity – that is, it can be converted into cash more quickly or less quickly. Liquidity is a very important aspect you must keep in mind when you’re considering an investment. Always ask yourself: Can I sell this investment and get my money quickly and easily? If yes, that’s a good thing. If not, here’s the next question: Am I okay with that?

Stocks in large, well-known companies that are traded on a major market are very liquid investments. This means that you could put in an order to sell your stocks and then get your money the next day. A home you perhaps own is not so liquid. You could probably sell it quickly, but not in the course of a day.

Why is liquidity important? Because being able to convert your investment into cash more quickly makes a given investment more attractive. The more surplus money you have, the more illiquid investments you can afford to have, because you probably won’t need to sell them right away. Very wealthy people tend to have fewer liquid investments. Investments that are less liquid generally yield a higher return. You can reach higher returns with them because you are forgoing the liquidity, or the ability to sell quickly.

Here are a few more examples of more or less liquid asset classes (listed from less to more liquid) to help illustrate the concept:

Real estate –> luxury goods –> commodities –> bonds –> stocks –> cash

Money secret No. 9: Make sure you know exactly how liquid or illiquid the investment is that you’re buying. Don’t be afraid to ask!