Financial Chemistry

Welcome to Chemistry class – Financial Chemistry, that is!

If you took chemistry, you might remember the states of matter: solids, liquids, and gases. We can also add plasma to this group as well. Also, remember that there are different elements in chemistry, as referenced by the periodic table. You know, elements like oxygen, hydrogen, carbon, nitrogen, etc. Gold and silver are elements too!

Well, transitioning chemistry to personal finance, we can see that there are many elements of finance that appear in different “states”. Let’s take two of those states, liquids and solids, and apply them to personal finance-oriented assets.

Liquid Assets

There are some assets that we can consider “liquid”. These can easily go from place to place, changing ownership with little problem. The best way to describe these are that they’re assets that can be sold, fairly quickly, for value that’s close to what they’re worth.

Here are assets that can be described as liquid, along with my assessment of their relative level of liquidity:

  • Cash (very high)
  • Bank accounts (high)
  • Stocks – taxable accounts (medium)
  • Bonds – taxable accounts (medium)
  • Mutual funds – taxable accounts (medium)
  • Stocks – retirement accounts (low)
  • Bonds – retirement accounts (low)
  • Mutual funds – retirement accounts (low)
  • CDs (low)
  • Vehicles (low)

Solid (Illiquid) Assets

These are assets that are not easy to sell immediately for what they’re worth.

  • Real estate
  • Business
  • Collectibles
  • Household items (clothes, appliances, etc)

What are the Implications?

You might all of a sudden need money, due to job loss, major illness, accident, or other reason. In times like this, you need to be able to have access to funds immediately to pay your bills. This is why we set up an emergency fund, which should contain the most liquid of assets in order to ensure accessibility of transferable funds. As those of you who read my blog know, I’m a fan of people saving 9 to 12 months for an emergency fund.

Beyond that, it makes sense to have funds accessible, doesn’t it? There could be any number of reasons that you might need or want to spend money or reallocate your overall investment portfolio, and if assets aren’t liquid, that becomes tough.

We have seen this with residential real estate in recent years. A lot of people put forth a significant amount of money into their homes, and have seen the values drop. More relevant to liquidity, however, is that they have been unable to sell their homes at a price that works for them. It seemed like many folks viewed homes as items that could be flipped or sold somewhat easily – thus considering them to be liquid assets. Well, clearly that’s not so, and this makes the case for being able to distinguish between assets that are truly liquid and illiquid. It can affect your finances and your day to day life!

As for collectibles, they’re only worth what someone will pay for them. An old baseball card, or antique figurine, that we might personally value may only be traded by a small group of people out there. Sometimes, the value is more to us individually than to others. With household items, such as clothes, they depreciate dramatically once we bring them home and wear them. Wouldn’t you pay a good deal less for an item of clothing that’s been worn than one that’s brand new? Of course!

My Question for You:

Do you ever think in terms of liquidity when it comes to your portfolio of assets?


  1. says

    I have always enjoyed chemistry but didn’t pay enough attention to liquidity in my investments putting most of my money into retirement accounts and real estate. It worked out OK until the financial crisis caused the banks to stop lending money. Now I am having to work on increasing my liquidity in a slow but sure manner.

    • Squirrelers says

      cashflowmantra – I think that up until the last few years, many people got into a mindset where the lines between liquid and less liquid assets began to blur. In particular, real estate began to be seen as an asset that could be flipped easily. Well, not so much any more. Seems like whether many realize or not, liquidity is getting increased priority.

  2. says

    Are CDs really low liquidity? Can’t you just cash out and pay a little penalty? I don’t have any money in CDs though so I don’t know. I have investment in all classes of liquidity and I think it’s essential to mix it up. Of course, we have good liquidity in the saving account for emergency fund.

    • Squirrelers says

      retireby40 – well, CDs aren’t as liquid as cash, right? That can go either way, I can see that. As for mixing it up, it’s ok to have a mix of assets – and many people naturally do have real estate in their portfolio, at least in terms of a primary home. Not liquid, but that’s ok as long people don’t misclassify like they did during the euphoric real estate boom:) Glad you guys are doing well with the emergency fund, by the way.

  3. says

    Some of those liquid assets (stocks, bonds, mutual funds) can have a big tax liability when it’s sold, costing more savings. Figure in the unwillingness to sell because of that. Keeping them separate from emergency fund money is what I do.

    • Squirrelers says

      novel investor – yes, you’re right. Those might be liquid in many ways, but they’re different in nature and serve a different purpose than an emergency fund does.

  4. says

    When I had income property I decided to diversify into cash businesses for multiple income streams. My current portfolio is diversified but only in allocation. I am no longer interested in taking on so much responsibility as I near retirement.

    • Squirrelers says

      krantcents – that makes sense to seek less responsibility in retirement, moving away from income property. This would be particularly true. There are ways to get a decent rate of return without such risk or time commitments.

  5. says

    I like the references to chemistry!

    We definitely look at the liquid assets in our portfolio. In my excel sheet of assets and debts, we sum things up at the bottom tha adds up retirement savings, liquid cash, and debts.

    • Squirrelers says

      Amanda – good to separate in that way, as cash is easier to access than retirement savings, particularly if tax-deferred.

  6. says

    Where would the giant nugget of gold that I have placed under my pillow fall in your list? I have wondered about gold because some same it is very difficult to get the ‘real’ market price for your gold. In other words, the price might be at $1700/ounce, but will I really get that if I sell my gold nugget?

    I think about liquidity all the time, and some of my assets will be more liquid than others, depend on market conditions. For instance, my stock sure felt a lot more liquid when it was profitable than when it wasn’t!

    • Squirrelers says

      Everyday Tips – that’s a good point you make about how much one can get compared to “market” prices. If gold is $1700 per ounce, it might be hard to get exactly that, right? However, if you dropped by some local place that buys gold and try to sell a one ounce piece of gold for $500, you’ll likely find it to be quite liquid:)

  7. says

    Personally I don’t consider anything that isn’t cash liquid. It takes time to sell things, to cash in investments and if you are truly in a situation where liquid assets are required, you won’t have that kind of time.

  8. Stephan Hilson says

    I am not fond of chemistry in the secondary school. But I am willing to learn financial chemistry if it will add more knowledge to my financial awareness. I haven’t think in terms of liquidity when it comes to my portfolio of assets. It is because I am still thinking of how to invest some of hard earned money in various investments. Thanks for your insights on liquidity and financial chemistry.

  9. says

    Haha… I can’t say I enjoyed chemistry, but I did enjoy this post. I do think of liquidity… in fact, when investing in anything, it’s an important element. When I buy stocks, I refuse to buy low liquidity ones… it can really burn a portfolio.

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