What does liquidity refer to in financial planning?

Liquidity in financial planning refers to the speed at which an asset can be converted into cash without significantly affecting its value. This concept is crucial for both individual and corporate finance, as it indicates how easily assets can be accessed in times of need. For instance, cash and cash equivalents, like savings accounts or treasury bills, are considered highly liquid because they can be readily used for expenses or emergencies.

On the other hand, assets like real estate or collectibles might take longer to sell and may not fetch their full market value upon a quick sale, thus representing lower liquidity. Understanding liquidity helps individuals and businesses manage their cash flow effectively, ensuring that they can meet short-term obligations while still investing for future growth.