If you're at all concerned with your financial health, and many times even if you aren't, you will have probably heard the term net worth at some point. It's relatively easy to understand, and it is a great concept for getting a quick idea of what your overall financial picture is. But, what is liquid net worth, and why does it matter?
Your liquid net worth is the sum of all of your liquid assets, like cash, stocks & other investments, and other assets with high liquidity, less all of the liabilities of your total assets. While liquid net worth isn't used as often as net worth, it can provide a better picture of financial health.
There are some other details and considerations that need to be factored in, but the overall importance of liquid net worth lies in the fact that not all assets are equal when it comes to accessibility or liquidity. Emergencies and similar situations will often require liquid assets and cash to be accessed rapidly or within a short timeframe. We're going to dive into more about liquid net worth, what exactly it is and why it matters, and even how you can easily calculate it yourself.
What Is A Liquid Net Worth
Liquid net worth is a very effective metric that is frequently used to determine a snapshot balance of highly liquid assets, as well as associated liabilities. In the simplest terms, it's the total of all liquid assets minus the value of all debts held. It represents the total amount of money that you may have at your disposal in a short-term or emergency. It is strictly for measuring the balance of liabilities to assets that are readily convertible to fiat currency or cash.
This is why for liquid net worth estimations, you should include things like checking accounts, savings accounts, money market holdings, stocks & bonds, certificates of deposit (taking into account early withdrawal penalties), and anything else that can be quickly converted to cash. For this reason, it generally won't include any low-liquidity assets like real estate, collectibles, artwork, or vehicles.
Liquid & Non-Liquid Assets Meaning
Many people get confused when trying to differentiate between liquid and non-liquid assets, which is a crucial distinction to make when trying to calculate liquid net worth.
Liquid assets are just about anything that you can convert to fiat currency or cash in a few days or less. This makes them available to use in emergencies and makes them a prime way to save money for short-term applications. The most common liquid assets include cash, money market holdings, bitcoin & other cryptocurrencies, checking & savings accounts, stocks, bonds, and some certificates of deposit. Many of these are already essentially cash, while a few others, like stocks and bonds, will generally take a few trading days to become cash that can be withdrawn to your account. Certificates of deposit, or CDs, are also considered relatively liquid assets because even though they are deposits made for a predetermined term, they can be withdrawn early with a small penalty in most cases.
Non-liquid assets are things that just simply can't be converted to cash as quickly. While, in some cases, you may be able to borrow against these assets and take loans out with these assets as collateral, they don't count in calculations for liquid net worth because to convert them to cash just takes too long. Non-liquid assets will generally take weeks or even months to become liquid. Common non-liquid assets include your vehicles, collectibles like stamps, NFTs, and physical artwork, furniture & appliances, real estate holdings, and business holdings. Assets like these would be listed in a pure net worth calculation but not in a liquid net worth calculation.
Difference Between Net Worth And Liquid Net Worth
The biggest and most critical difference between total net worth and liquid net worth is that when looking at liquid net worth, you automatically ignore any assets that cannot be converted to cash in a relatively short period. This makes liquid net worth somewhat of a more accurate picture of your ability to withstand emergencies or unexpected life events than pure net worth. It can be used as a metric to evaluate your resilience with surprising accuracy. Net worth, however, is a more accurate metric for evaluating your overall level of wealth.
How To Calculate Liquid Net Worth
In most situations, you can do a little fast math with your own finances and come up with an estimate of your liquid net worth. You need to total up all of your liquid assets and subtract the amount of non-liquid assets and liabilities. Remember that your liquid assets can include:
- Cash (checking, savings, and money market holdings)
- Cryptocurrency holdings
- Treasury notes, bills, and bonds
- Mutual funds, stocks, other investments, and financial instruments
It's worth noting that in some calculations, you can include your vehicle, subject to a few conditions. First, you won't be able to sell your vehicle immediately for anything close to the blue book value, so you generally will discount that amount by a significant percentage. Often around 20%.
For your liabilities, be sure you subtract any of the following that may apply to your financial situation:
- Mortgage (first and second if applicable), HELOC, home equity loans
- Auto loans
- Credit card balances
- The tax burden on investments, including IRA and 401(k)
- Student loans
- Outstanding taxes
- Personal loans
- Alimony, child support
- Any other debt or financial liabilities
Tracking Your Net Worth
If you want to keep an ongoing view of your liquid net worth and your ability to resist being cash-poor, you'll want to begin tracking your net worth. Some choose to take monthly snapshots to track, while others choose to look at it on a much smaller timescale and measure it weekly. Ideally, you'll want your liquid net worth to be at least twice what you would want for a reasonably comfy retirement nest egg.
The Benefits Of Tracking Your Liquid Net Worth
- You will have greater visibility into how your liquid net worth changes over time, as well as what external factors or stimuli may influence it the most. This can help you make more intelligent and effective decisions about your investments.
- A major benefit is that tracking your liquid net worth can help you stay on top of savings or investment goals by keeping your mindset focused on top priorities. When it comes time to make additional investments, you'll know when and where you'll be able to put your money for it to have the greatest effect.
- You'll have more insight into your total net worth and how that changes in relation to your liquid net worth over time. This can help give you more foresight into how you manage your finances in paycheck-to-paycheck situations or where you encounter an emergency that drains significant amounts of liquidity.
- Constantly monitoring your liquid net worth will give you a greater ability to see and understand your personal finances in the context of your long-term financial goals.
How To Increase Liquid Net Worth
After doing some calculations, you may have determined that your liquid net worth isn't where you'd like it, and now you want to do something. Perhaps you have been tracking your liquid net worth for a while and simply noticed that the numbers are getting lower and lower, and now you've been prompted to make some changes to bump those numbers up. In either case, increasing your liquid net worth isn't complicated, especially if you look at it in the context of how it's calculated. Here are some easily-actionable tips for boosting your liquid net worth.
Pay Down Debt
One of the biggest factors in determining liquid net worth is the number of liabilities you have, and reducing those can make your liquid net worth numbers look much better. Start with your most expensive debt, the debt that comes with the highest interest rates attached to it, and pay that down. This will reduce monthly payments and increase disposable income and available cash.
Reduce Unnecessary Expenses
Some people spend way more than they think on unnecessary expenses each month. Eat out one or two fewer times, and put that money toward an investment or debt payment instead. Cancel a subscription for a month or two. You'll see liquid net worth improvement relatively quickly.
Investing more is one of the most powerful ways to increase your liquid net worth. Not only because you aren't technically spending the money, but once it's invested, it creates more money. Low-risk investments like CDs or bonds are popular, as are dividend stocks and funds, many of which can create residual income.
Increase Your Income
This one is generally easier said than done, but it's possible. When the calculation hinges largely on disposable income, an easy way to boost your liquid net worth is to create more income. Start a job hunt for somewhere that will offer better pay, or jump into the side-hustle or gig economy and make a little extra money that can be used to pay down debt or simply stick in a low-risk investment.
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Understanding Liquid Net Worth Can Increase Your Financial Literacy
Knowing how liquid net worth works can not only make you more financially literate overall, but it can help you make more effective financial decisions. You'll know at a glance how your finances are doing and whether or not you have the liquidity that you feel fits your risk tolerance best.
Shawn Manaher is a former financial advisor, has founded 5 online businesses, and is a coach, speaker, podcast host, and author. He's been featured on Forbes, The Consults Corner on TAE Radio, The Writing Biz, What's Your Story, and more.