Liquid investing offers the opportunity to build your wealth while keeping your funds easily accessible. With the help of liquid investments, you can steadily grow your net worth without tying up all of your funds in an inaccessible investment opportunity.
Let’s explore what liquid investments are and why it is important to maintain these types of assets as a part of your financial strategy.
What are liquid investments?
Liquid investments are types of investments that you can smoothly convert to cash or cash equivalents. The transition from a liquid investment into cash should be a fast process that doesn’t require too much time or energy. Additionally, converting a liquid asset into cash shouldn’t cause you to lose any capital.
The ease of access makes a liquid investment a great place to store your emergency fund. Another useful purpose for a liquid investment is a place to build your savings as you work towards a major purchase such as a car or a down payment on a home.
Although the advantages of working with a liquid investment are easy to see, there are some drawbacks too. When you choose to put your funds in a liquid investment, you will likely miss out on the opportunity for higher returns with a more risky investment.
For example, let’s say that you put your savings into a high yield savings account as a liquid investment vehicle. With that choice, you will likely miss out on the potentially higher yields of putting those funds into a real estate investment. However, you’ll have peace of mind knowing that you can access your funds at any time without any fears of selling your property at a major loss.
As with all financial choices, there is a balance between risk and access. You’ll need to decide for yourself which portion of your portfolio will be curated as liquid investments.
How does liquid investing work
Essentially, liquid investing works by providing the most access to your funds as quickly as possible. Although there are different kinds of liquid investments, the goal of easy access to your funds remains throughout.
When looking at the right liquid investment for your life, consider the risks and rewards associated with each option. Since everyone’s finances are different, you’ll have to choose which liquid investment is right for you.
On the other hand, an illiquid investment would require you to relinquish regular access to the funds in favor of a higher potential return.
8 Types of liquid investments
Now that you know more about liquid investing, let’s take a closer look at some of the types of liquid investments you can choose to pursue.
1. Interest-bearing checking account
Typically, a checking account is not considered an investment. Instead, it is often thought of as an essential financial account that is designed to help you manage your money flow efficiently.
However, some interest-bearing accounts out there earn a place as a great liquid investment option. Since a checking account will give you quick access to your funds, it is as liquid as possible. Plus, the interest-bearing component will allow your funds to grow within the account.
2. High yield savings account
A high yield savings account is a smart place to stash funds you want easy access to. With a competitive high-yield savings account, you can continue to build your savings in a low-risk way.
3. Money market account
A money market account offers some of the best features of a savings account and checking account in a single format. You may gain access to check writing and ATM withdrawal privileges, but you’ll have to stay within the limit of six withdrawals per statement cycle to stay in line with the rules set by the Federal Reserve.
Plus, money market accounts often offer a higher yield than a savings account. With that, a money market account is a great way to build your savings in a single account that you can regularly access.
4. No-penalty CD
Certificates of deposit, otherwise known as CDs, are typically thought of as illiquid investments. That’s because traditional CDs require you to agree to lock up your funds until the specified maturity date in exchange for a certain rate of return.
If you need access to your funds early, you’ll have to pay a significant fee for that choice. However, it is possible to tap into the security of a CD without giving up access completely for an extended period of time. A no-penalty CD can give you the access you need to use a CD as a liquid investment.
Stocks are volatile investments that can be liquidated relatively easily. As we can see throughout history, the stock market can rise and fall dramatically. However, you may face a loss if you are forced to liquidate your stock holdings at an inopportune moment.
With that, you may want to think twice before counting on your stock to cover an emergency on short notice. But don't let that scare you away from investing in stocks because they are a great way to diversify your portfolio.
When you buy a bond, you expect to earn interest on that investment until the maturity date. However, you can choose to sell a bond early to tap into your funds sooner. With that, bonds can serve as a liquid investment vehicle.
ETFs, exchanges traded funds, allow you to invest in an index of stocks instead of a single company. The appeal of ETFs is that the passively managed funds have fewer fees to contend with than actively managed funds.
However, this investment choice will be as volatile as the market. With that, you may be forced to sell at an inconvenient time. But you will be able to tap into your funds when you need them.
Cash is the most liquid asset of them all. Although holding money in cash isn’t truly an investment, it is a liquid form of funding that you can use immediately when the need arises.
When does it make sense to pursue a liquid investment?
A liquid investment allows you to tap into the funds you need at short notice. With that, liquid investments are best if you are saving for a big purchase or want to have quick access to cash as a part of your emergency fund.
Liquid investments have their place in any financial plan. But you should also consider illiquid investments that could provide higher potential returns.
Make liquid investments part of your portfolio
Liquid investments are a useful tool to help you stabilize your financial future. You’ll have the option to tap into the funds you need at short notice. Learn more about building wealth and investing with our free investing 101 course bundle!