What is Asset Liquidity?
Asset liquidity is a commonly used term that can sound a lot more complicated then it actually is. If you have ever applied for a loan, you are most likely aware that applicants for a home loan must have certain asset requirements in order to get a mortgage. The chief reason for this is to ensure that individuals are still able to pay their PITI; or principal, interest, taxes, and insurance, in case of an emergency. Part of these requirements is for a certain portion of your assets to be “liquid”. An asset being described as “liquid” merely means it is easily transferrable throughout the general public, or either has cash value or can be converted to cash fairly quickly.
Examples of Liquid Assets:
- Deposit account funds (checking and savings)
- Certificates of Deposit
- Mutual funds
Examples of Non-Liquid Assets:
- Real estate property
- Commodities (gold, oil)
Why is Asset Liquidity Important?
Asset liquidity is important in case of an emergency, particularly financial emergencies. These liquid assets represent the ability to take care of any surprise day to day life might throw at you by easily transferring this cash value into resolving your problem. Most financial advisors will suggest a minimum of six months liquid assets in order to pay your PITI in case of any unforeseen issues. That way you can focus your energy into fixing the problem and finding a solution rather then juggling responsibilities and oncoming debt.
For instance, lets say you have in your possession very expensive real estate and several costly paintings as well as the newest technology installed throughout the house. Aside from that you are working a job in which you make just around what you owe, so you are unable to save much. WHile you appear wealthy on paper because of the combined value of your assets, when it comes to liquid assets you are unable to make your PITI payments and therefore financial advisors would resist giving you a mortgage.