How can rich people drop all so much money on a daily basis but when they need larger amounts of money, they need to liquidate assets?
Yes, I know that wealth can come from owning assets outside of cash, but how can you spend hundreds of thousands of dollars a month if a their money and wealth is all tied up?
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Liquidity measures how easily holdings can be moved or converted into other financial instruments.
I can own $500 million in real estate and have no cash in the bank. I am quite rich. But because I have to sell property before I have any cash to spend, my wealth lacks liquidity.
If my net worth is the fifty dollars I have in my wallet, I am dirt poor. But my assets are completely liquid.
Ever heard of a liquidation sale? Businesses that go belly up will try to sell off their inventory to generate cash, even if prices yield an apparent net loss, because money’s time value means that wealth you can spend now is literally worth more that wealth you cannot spend now.
Time value of money is the essential principle upon which concepts like interest are founded.
Banks will lend cash to people of high net worth, who must then pay back the loan plus any interest the bank charges. This gives the lendee access to liquid cash, for which they pay a fee (interest).
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