Liquidity is simply how easily any asset can be turned into cash. Some assets are easier to convert into cash for a needed purchase or emergency than others. For example, a mutual fund is easier to liquidate than a car, and a car is easier to liquidate than a house.
Lenders will often compute a liquidity ratio of your finances in addition to your income to determine your ability to pay off a debt before loaning you more money for something like a car or home.
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