Liquid Assets

Liquidity describes how easily an investment can be converted to cash without loss in value. Cash itself is totally liquid, whether it’s in your checking or savings account — or in your hand.

CDs and T-bills are a little less liquid because they have maturity dates at which the full value of the interest they pay is due. You have access to your money before the maturity date, but there’s a cost. You usually lose some or all of the interest you expected. With T-bills, you could potentially lose some of the principal, or purchase price.

Liquidity is appealing. But if you keep all your money in liquid accounts for the long term, you actually risk losing buying power. That’s because liquid investments tend to pay interest at a lower rate than the rate of inflation.

The result is that it’s more difficult to reach your goals within a reasonable time frame. So in addition to saving, you need to invest to make your money grow.

 

 

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