Liquidity is how quickly an asset can be converted to cash.
When is liquidity important?
Liquidity is important when you need cash quickly, for example to pay down a loan. When asset prices are decreasing in value you may also want to liquify (sell) your asset to minimise losses.
What are liquid assets?
Shares, mutual funds, and savings accounts are liquid assets as they can be quickly converted to cash.
Your super money is a special type of liquid asset. While you cannot withdraw the money until you retire, you can transfer your growth fund to a capital stable fund reasonable quickly to reduce potential losses.
Non-liquid assets include property and businesses. They are not considered liquid as the process to sell a house or a business typically takes over a month.
Being forced to wait when you need access to quick cash to pay a loan or healthcare costs, may mean you cannot pay in time. This can have dire personal consequences.
In case of emergency
Banks require loans to be paid, even if property prices decline or you lose your job.
Liquidity is very important to your financial health. While it is great to have lots of property assets, you might not have time to sell a property to meet your obligations.
You need liquid assets available in case of emergency.
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General advice disclaimer
This is general information only and does not take into account your personal objectives, financial situation or needs. You should assess whether the information is appropriate for you having regard to your objectives, financial situation and needs and consider obtaining independent professional advice before making an investment decision. If information relates to a specific financial product you should obtain a copy of the product disclosure statement for that product and consider that statement before make a decision whether to acquire the product.