Whether you are in business or in career, you will have some kind of liquid assets with you. At different occasions you will be asked to declare your liquid assets. For example, when you are completing your credit card application or filling the form for personal or business finance. Therefore, it is better you get a hang of what are liquid assets.
Liquid Assets Explained
You have assets such as bank balance or real estate. Fine. When you begin to dispose the assets you find bank balance can be withdrawn on demand whereas real estate takes quite some time for its disposal. You got it right. Primarily, liquid assets can be disposed of quickly and with ease. This aspect is known as negotiability. Secondarily, such disposal must not reduce the capital amount you hold. In other words the sale value and the market value must be one and the same. Your bank balance of X amount can be withdrawn as X amount unless the bank imposes any service charge. However, in the case of real estate when you dispose you will do so discount to the market, which is sale value less than the market value. So bank balance is a liquid asset while real estate is not.
Type of Liquid Assets
On the basis of scale of liquidity I am jotting down several types of liquid assets, to enable you to take right decision in making and disposing investment:
1. Cash-in-hand: This relates to currency & coin that you have in possession. This is the most liquid ones you have. In every country the national currency is the legal tender while currencies from other countries are known as Foreign Exchange holdings. Foreign currencies are converted to local currency via Foreign Exchange market. Generally
U S Dollar is the base foreign currency for international travel and transactions
2. Cash-at-bank: You can have cash at bank in a savings account or a checking/current account. Balance in the latter can be withdrawn on demand or by writing a cheque. Generally, savings account balance can be withdrawn on demand, but some banks such as HSBC restricts the withdrawals to once a week
3. Un-utilized balance in Debit card: Any balance not withdrawn so far from your debit card is ranked third in our liquidity scale. You can swipe it anywhere or present over the counter and draw out money. I must caution you about an erroneous impression many of you have about credit cards. Unlike debit card, credit card has no liquidity in-built. It only helps you to finance your purchases out of the issuer’s money and not yours
4. Mutual / Unit Trust fund: Your mutual/unit trust account is ranked next in the liquidity scale. You can give notice generally one day, and withdraw an amount from mutual / unit trust account that lie to your credit. However, if you wish to take out the full amount your account need be closed prior to such withdrawal
5. Money Market fund: Similar to the mutual in terms of liquidity, money market funds differ in terms of volume and value. Generally, you are required to give notice before effecting any withdrawal
6. Surrender /Cash value in Life Insurance Policy: As you continue to pay your premiums on the life insurance policy, it collects a pool of money and after a certain period it begins to be marked as surrender or cash – value. This amount can be readily withdrawn or be pledged to a lender for a personal finance
7. Treasury Bills: Though Treasury Bill is considered as a guild edged investment with high degree of liquidity it suffers from a snag. Depending on the market movement for short term funds it will be quoted either premium or discount to market value. Good times you get premium; bad times you get discount. Hence, there is an equal chance of losing part of the capital stated on the face of the bill
8. Government Bonds: Similar to Treasury bills in price movement; yet, Government bonds do so in wide margin. Assuming you got the bond at 5% interest rate and the current rate of interest is 7% then the bond’s capital value will be reduced. Never the less Government bonds give you safety, guarantee and above all liquidity
9. Liquid Shares in Stock Market: Although there is huge volatility in the stock market, any shares that you hold which is traded frequently in the market can be counted as liquid asset
10. Amount due to you via Legal / Admin process: This is the last item in our liquidity portfolio. If there is any court order for damages payable to you or any award made say in the case of partition tantamount to be a liquid asset arising from legal process. In similar fashion business persons sometimes get grants or tax refunds that are construed as liquid asset arising from administration process.
Before you make an investment in or dispose of any liquid assets, you must ensure that you maintain cosmic balance. Cosmics are aspects that are beyond facts & figures but still influence the conduct of your finance and investment; cosmics reside in every individual and by extension in everything he is engaged in generating finance. If you understand your cosmics you can develop a right mix of liquid assets in your portfolio.
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