Liquid Investing

Invest your money with varying levels of liquidity. Liquidity refers to the ease with which you are able to access your money. A 401(k) that you can't access until you are 59 ½ years old without a stiff penalty has very low liquidity. A checking account that pays interest has high liquidity because you can access those funds any time you write a check or use your ATM card. In most cases, the higher the liquidity, the lower the interest rate you'll earn on that investment. To free up money for more profitable investments, only keep as much money in liquid investments as you anticipate needing in the short term. Because of its extremely low interest rate, your checking account should ideally never have more money in it than you will need to pay for two months of expenses. An emergency account can be held in a slightly less liquid money market account. Choose less liquid, higher interest-paying investments for your other savings.