What does liquidity mean in financial terms?

Liquidity in financial terms refers to the quality of an asset being easily converted to cash. This concept is vital because it measures how quickly an asset can be turned into cash without significantly affecting its price. For example, cash is the most liquid asset, whereas real estate is considered less liquid because selling it typically requires more time and effort and may involve costs that affect the sale price.

Understanding liquidity is crucial for personal finance and investment decisions, as individuals need to ensure they can access cash when needed, especially for emergencies or unexpected expenses. Additionally, assessing the liquidity of assets can help in planning investment strategies, as highly liquid assets provide more flexibility in managing one’s finances.