What constitutes a liquid asset?To help prevent this from happening, you should think of assets as falling into the following categories:
- Illiquid. Things such as equity in a home are very difficult to access in a pinch. Yes, you could borrow against that equity, but paying money on a mortgage loan just to access your equity is not an efficient way to use your assets. Also, any investments in a retirement portfolio that would require you to pay a tax penalty in order to access them should be considered illiquid unless you are of retirement age.
- Semi-liquid. Stocks and bonds can be sold as needed, but not without advance notice, and if you have to sell them under duress, you may lose by selling at an inopportune time. These should be considered semi-liquid assets, which can be used as long as you have plenty of advance notice.
- Liquid. Things like savings and money market accounts can be accessed almost immediately, and thus should be considered liquid. CDs are a gray area -- they do lock your money up, but they could be considered somewhat liquid if the term is not too long, or if the early withdrawal penalty is not too severe.