What does liquidity refer to in financial terms?

Liquidity in financial terms refers to the ease of converting an asset into cash without significantly affecting its market price. An asset that is highly liquid can be quickly sold for cash, making it accessible for immediate use. This is particularly important in personal finance because having liquid assets allows individuals to cover unexpected expenses or take advantage of new investment opportunities without delay.

For instance, cash in a bank account is considered highly liquid because it can be accessed immediately. On the other hand, assets like real estate or collectibles may take longer to sell, making them less liquid. Understanding liquidity helps individuals manage their finances effectively, ensuring they can meet short-term obligations while still pursuing long-term investments.