What is Liquid Net Worth?

Joseph Meyer
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Why Liquid Net Worth Matters

Liquid net worth is the sum of liquid assets and liabilities. An investor should know his or her net worth.

Here are some of the reasons why you should be concerned with your liquid net worth.

{1}. Liquid net worth is important to gauge if you have any cash flow issues (positive or negative).
{2}. Knowing your liquid net worth helps you prioritize your spending and saving efforts.

Total Net Worth vs. Liquid Net Worth

Net worth is the total value of a person’s assets (what you own) minus the total value of liabilities (what you owe). Assets include cash, bank accounts, retirement savings and investments, real estate holdings, any business you own, etc. Liabilities include credit card balances, student loan debt, mortgages, car loans, or any other money you owe to anyone else.

However, this definition of net worth does not specifically include investable assets, such as your time, skills, physical presence, or any intellectual property you might own. After all, it can be difficult to convert these assets into cash without going through a lot of hassle.

Liquid net worth is your total net worth minus any assets that will be liquidated to provide for basic living expenses. In other words, it is the disposable amount of money you have available to meet emergency expenses.

Liquid Net Worth = Net Worth – Living Expenses

The formula for liquid net worth is simple. But the meaning is much more important and meaningful. Your liquid net worth and your cash savings are what’s standing in between you and a financial emergency.

Factors that Affect Liquid Net Worth

When you consider your overall financial situation, you should also consider liquid net worth. How much liquid net worth do you have? Liquid net worth is essentially defined as the value of your assets that are easily converted into cash. It’s considered to be the total of your cash, investments, marketable securities, and other assets that you can sell quickly and easily with little change in their values.

The key with liquid net worth is that the values of the assets are easily converted into cash. For example, a house is not considered to be liquid net worth because it would be difficult to sell your house for cash quickly and easily.

True Liquid Assets

You might have noticed that the majority of millionaires have money in the bank, a vacation home, and some investments. But what you might not have known is that most of them have a third asset, called liquid net worth.

Liquid net worth is the amount of assets you have which can be converted to cash within a short period of time. These assets can include saving accounts, CDs, treasury bills, money market funds, bonds, mutual funds, and stocks.

Liquid net worth can be used to make your money work harder for you. But it’s really only worth anything if you can get your hands on it quickly. Your true liquid net worth, otherwise known as available liquidity, is the amount of cash you can withdraw without disrupting the value of your assests or your monthly cash flow.

It’s the difference between what you have and what you can’t live without.

When you’re trying to determine the balance of liquid assets you have, it’s important to subtract housing, food, and transportation expenses from your total assets. Although these expenses (mortgage, your monthly car payment, and gas) are necessary, they have a fixed cash outlay and you’re unlikely to go hungry if you deprive yourself for one month.

Retirement Plans

Investments and Liquid Net Worth.

Liquid Net Worth is a measure of your total assets minus total liabilities. In essence, it is a measure of both your liquid and illiquid “ that is, highly liquid “ assets. Your assets include your home, vehicles, retirement accounts, cash and other assets that could be used to purchase items for current use. Your liabilities include your mortgage, car loans, credit card and other debts.

If you could sell your home tomorrow and pay off all your debts, you would have a positive net worth. If you couldn’t, however, your net worth would be negative. Remember that net worth is a measure of assets minus liabilities. If your mortgage and other debts are more than your assets, your net worth will be negative.

The good news is that if you have a good portion of your housing and car prices under your control and have the potential to pay off your debts as soon as you can, you can start your retirement planning right away and enjoy better financial results. Without this liquid net worth, retirees must take stock of their current net worth and start planning to build that net worth.

Real Estate

Increased liquidity allows for increased versatility. Another benefit of a liquid net worth is that you can use your money to accomplish your financial goals.

This could be paying off an existing mortgage on your primary residence, funding a college education for your children, or any other goal that fits your expectations.

Another benefit of a liquid net worth is that you will have increased control over your money unlike a retirement plan. If the interest rate on the retirement plan is very low, you will not be able to manage your money in a way that is beneficial to your goals.

With a liquid net worth, you will be able to determine which investments are currently paying the most.

Lastly, if you want to make a large purchase and you have to get money from your retirement plan, you will be forced to pay taxes and penalties for taking your money out of the retirement plan. With a liquid net worth, you will be able to get your money out of an investment without paying penalties.

Business Interests

“Furnishings and Trinkets”

Today, the word net worth sends most people into a tizzy. They will be talking about liquid nets worth, which is a far cry from the net-worths of earlier years: liquid, in the sense of actual, usable cash.

Sadly, we’re not talking about cash. Liquid net worth is simply the current value of all your assets, minus your liabilities.

Assets are things you can cash in, that are so valuable they would pay off all your debts. Again, this is a much simplified perspective, and we’ll look at this phrase in a far more meaningful way.

Let’s say you were to walk into a bank and ask for a loan. You’re planning to buy a house, and you need a loan. The bank will probably ask for a few supporting items – income and cash flow statements, a credit report, perhaps a recommendation from a former employer.

If this process sounds cold, it is. The bottom line, however, is a simple question: Is it likely that you can pay this loan back?

An Example of How to Calculate Liquid Net Worth

Liquid net worth, or liquid assets, is a very general term that’s often used to refer to cash, savings, and liquid investments. It’s the total assets you can turn into cash quickly and without any sort of penalty.

If you want a more specific answer, the best way to calculate liquid net worth is to add up your liquid assets, subtract your liabilities, and arrive at the number. Sounds simple enough, right? Compared to calculating total net worth, figuring out your liquid net worth requires less input and a lot less time.

But the simple answer is also the hardest one to audit and verify. Taking a detailed look at your traditional assets, such as savings accounts, stocks and bonds, and checking accounts, and your liabilities, such as credit card or student loan debt, will serve you better if you want to get a real sense of your overall net worth.

If you do decide to look into the details of your liquid assets, realize that you’re not only looking for the real-time value of these assets, but also their liquidity. An asset may display a high value now, but if it takes time to sell off, that value can’t be used to cover your liabilities.

Final Thoughts on Liquid Net Worth

Liquid net worth generally refers to monetary assets that can be quickly transferred into cash. The most liquid of all monetary assets are cash and cash equivalents, since you can easily convert these assets into actual cash.

Another term you hear quite often in the context of personal finance is free cash flow, which is a company’s cash flow from its normal operations after it has made investments in capital spending for expansion, upgrading equipment, and purchasing new office buildings, factories, production lines, and so on.

The term “free” in free cash flow refers to the fact that it’s cash flow after deducting the costs of equipment purchases, and not free of cost altogether, as in having no costs.

Most of the time, the idea of free cash flow refers to the cash left over after a company covers its operating expenses and any outstanding bills.

This is important because in the personal finance context, the idea is to keep your spending as close to your income as possible. Naturally, then, your personal cash flow will be the amount you have left over at the close of a month after you pay all of your expenses, including your mortgage, credit card bills, pension contributions, utility and car loan payments, etc.