Imagine your car breaks down today. Do you know where you’d get the repair money?
That’s a question that Phil Watson, a private wealth advisor with Ameriprise Financial, asks his clients. His point? If — or when — the unexpected happens, you need a plan in place.
“Cars do break down,” Watson says. “Kids do get sick. Jobs do go away. What are you prepared for should those kinds of things happen?”
To ensure you don’t wind up stranded on the side of the road, it’s wise to have a cushion of liquid assets. But first, you have to know which assets are liquid and which are fixed. Here are the basics.
What is a liquid asset?
Just as a liquid is easier to drain than a solid, a liquid asset can be drained more easily than a fixed asset.
“A liquid asset is anything that can be easily converted into cash,” Craig D. Allen, president of Allen Wealth Management in Santa Barbara, California, said in an email.
Money is considered liquid if you can access it quickly with limited consequences — minimal or no surrender costs or market impact, for instance.
Common examples of liquid assets include:
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What is a fixed asset?
Fixed assets are also called permanent or illiquid assets, according to Allen. They’re great for building wealth, but as you might suspect, it takes longer to convert them into cash. And if you’re in a tight spot financially, expediting the process can be costly.
For instance, if you withdraw contributions from your 401(k) before you’re age 59½, you’ll likely pay a penalty. And Allen gives the example of a piece of artwork; you might be forced to sell it at a discount if the art market is soft when you need the money.
Common examples of fixed or illiquid assets include:
- Real estate
- Retirement savings
Where to start
If you’re just beginning to think seriously about your finances, start by building up liquid assets — specifically, an emergency fund, or rainy day fund, to cover unexpected expenses.
There’s no magical dollar figure you need in your emergency fund, but ideally, it should cover all the bills you absolutely have to pay for several months, such as your mortgage and car insurance.
If you’re not sure how much that is, Watson has a question: If you lost your job, how long would you last before running into trouble?
Set aside extra money from each paycheck if you have less than a month or two worth of expenses already saved. Our tips on how to save money can help. Stash those dollars in an easy-to-access place, such as a savings account.
Once your emergency savings are fully funded, consider other ways to use your money beyond liquid accounts. Start by investing for retirement to set yourself up for long-term financial stability.