Liquidity
How quickly something can be turned into spendable money without losing value.
Cash in a savings account is liquid: available today, at full value. A house is not — selling takes months and costs a great deal.
Investments sit in between. Usually sellable within days, but only at whatever price is available that week, which may be a poor one.
This is why an emergency fund is held in cash rather than invested. Its whole job is to be available at full value at a moment you did not choose.
The common mistake is a strong net worth with no liquidity — someone asset-rich and cash-poor, borrowing expensively against a house they have been diligently paying down.
Words on this page
- Emergency fund — Cash set aside to cover unexpected, necessary and urgent costs, so they do not become debt.
- Net worth — Everything you own minus everything you owe — one number for your whole financial position.
Related terms
Covered properly in Learn.