Fixed Vs. Liquid Assets: What Is the Difference?
Do you have a mix of fixed and liquid assets? Do you know the difference between the two? Effective asset management includes understanding the difference between a fixed asset and a liquid asset, and understanding how each fits into your financial plan.
What are fixed assets?
Fixed assets are also sometimes referred to as "plants." This is because they are not going anywhere any time soon. These are assets that you have and that you plan on holding for a while. In order for an asset to be considered fixed, you should not be planning to convert it to cash in the current, nor even the upcoming, fiscal year. Additionally, fixed assets are assets that you cannot just convert to cash with relative ease. However, fixed assets have potential to help you build wealth over the long run. Most people have at least one fixed asset: a home.
Some examples of fixed assets include:
- real estate
- furniture
- manufacturing equipment
- antiques
Real estate is one of the more common items brought to mind when one thinks about fixed assets. Additionally, it is one of the fixed assets most likely to increase in value and offer you a way to build future wealth. And, even though furniture and manufacturing equipment decrease in value over time, they are considered fixed assets. If you are using them for your business, it is possible to get tax deductions for them. Antiques, if you find the right kinds, can turn out to be great fixed assets that can appreciate in value.
What are liquid assets?
Liquid assets are, well, liquid. This means either cash or something that can be converted into cash with relative ease. While a fixed asset is tangible, something you can touch, most liquid assets are intangible. Short-term securities, checking and savings accounts, and even some short-term bonds are considered liquid assets. These are things that allow you access to money fairly quickly. As bonds mature, you can access them quickly. You can withdraw money from your accounts at any time. Securities can be sold for cash in a pinch. Even your IRA can offer a fairly ready source of cash (although I do not recommend viewing your IRA as a source of ready cash).
Liquid assets are especially important in emergency situations. Your financial plan should take into account the fact that you may need cash in a bind, and liquid assets can provide that cash without a great deal of waiting.
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Incorporating fixed and liquid assets into your asset management plan
It is important to set up your personal finances so that you have both fixed assets and liquid assets. Both types can help you build long-term wealth, but they do so in different ways. Much like diversification in your stock portfolio is important, making sure that you have both fixed and liquid assets is important.
The fixed assets give you something solid that you can fall back on—something that isn't just an ephemeral concept, but rather something of solid value that won't disappear if the market crashes. The liquid assets provide you with ready cash for emergencies and a way to pay everyday expenses. Having both, and managing them properly, is one of the keys to successful asset management.
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