Liquidity refers to how easy it is to convert an asset to cash. Cash equivalent assets such as money market funds, bank savings, and checking accounts have a high level of liquidity.
A liquidity ratio indicates the number of months that an individual or family could continue to meet household expenses by tapping cash assets (e.g., if they lost a job or were disabled). It is calculated by dividing cash assets by monthly expenses.
For example, if a family has $6,000 in cash assets and monthly expenses of $2,000, their liquidity ratio is 3.0. The higher the number, the better the ratio because it means that more months of expenses can be paid from a cash reserve.
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