What Is Liquid Net Worth & How to Calculate Yours
Chances are, you’ve probably heard the term “liquid net worth” thrown around a time or two in the personal finance realm. But, what exactly is liquid net worth? And, why is it an important thing to know?
Liquid Net Worth Defined
Liquid net worth is basically the amount of money you’ve got in cash or anything that is equivalent to cash, like stocks and bonds, after you’ve subtracted any liabilities. It’s actually pretty similar to your total net worth, which I will talk more about in a bit. It’s accounts or items that you can do a quick sale on to get cash for in case of emergency.
What are Liabilities?
Liabilities are any financial debts you owe. Liabilities can include:
- Credit card balances
- Car loans
- Personal loans
- Student loan debt
- Mortgages and home equity lines of credit
What are Assets?
Your assets are anything you own that has a numerical value tied to it. There are two different types of assets that you can own:
- Liquid assets are items that you can exchange for cash quickly (think 24 hours) for it’s full liquid value. An example would be a money market account that can be converted to cash quickly.
- Fixed assets are items that can take time or money to convert into cash. An example of a fixed asset would be a house, or real estate (like a quadplex). It takes time to sell, depending on the market, the buyer, etc. And, the price that you get for the house can fluctuate based on these factors as well.
What are Liquid Assets?
Liquid assets are types of assets that can be easily converted or liquidated into cash for their full value.
While researching this post, I found a great article from Next Level Finance that defined liquid assets in a simplified way. The article’s writer, Kevin Parker, said that if you can convert an asset into cash within 24 hours, it’s a liquid asset. He also stated that the “faster you can sell an asset and convert it into cash, the more liquid it is.”
I don’t know about you, but I like that definition.
Anyway, here are some examples of liquid assets:
- Money market accounts
- Checking / bank account
- Brokerage account
- Savings accounts
- Mutual funds
What are Fixed Assets?
Some examples of fixed assets (or non-liquid assets) include:
- Real estate
- Cars or other vehicles
- Retirement accounts
- Valuable pieces of art
A Note About Stocks and Bonds
While stocks and bonds are considered liquid assets, you need to keep in mind that you could be charged capital gains taxes when you liquidate them. So, don’t forget to consider that when calculating your liquid net worth.
Is a 401(k) Liquid Net Worth?
Retirement accounts, like your 401(k) or a traditional IRA are not considered liquid assets until you reach retirement age. This is because if you were to liquidate them, you would not receive the full value due to the fact that you will have to pay an early withdrawal penalty and transaction costs for cashing them in too early.
Now, a Roth IRA is another story. Since you can take money out of a Roth IRA without facing financial penalties or having to pay taxes on your withdrawal, it can be considered a liquid asset.
Is Your House or other Real Estate Considered a Liquid Asset?
No, your home or other real estate properties are not considered liquid assets. Remember, a liquid asset is something that you can convert into cash (at its full value) in a short period of time, ideally 24 hours. A home or property can take months to sell. Plus, you don’t know what kind of offer you’ll end up getting on any properties you sell, since the real estate market can be crazy and the value of your home can fluctuate. You may have to take less than the house’s fair market value, expecially if you need the money quickly. And, there are all kinds of taxes and fees you’ll have to pay once you do sell your property. And, let’s not forget about your realtor’s commission.
How to Figure out Your Liquid Net Worth
Calculating your liquid net worth isn’t all that difficult. The first thing you will want to do is add up the cash value of all of your liquid assets. Then, you will need to add up all of your liabilities. Then, just subtract the sum of your liabilities from the sum of your assets.
Total Liquid Assets – Total Liabilities
Say you have $20,000 in your savings account, $10,000 in your checking, and $30,000 in a money market account. That comes out to $60,000.
Now, let’s say you owe $5,000 on your credit card and have $30,000 left on your student loans. That comes out to $35,000.
So, $60,000 – $35,000 = $25,000.
Why You Should Know Your Liquid Net Worth
It’s important to know your liquid net worth number in case you need to quickly cash out your assets for an emergency. For example, medical emergencies are expensive in the US, so it’s good to know what you can easily convert to cash equivalents instead of throwing them onto credit cards.
Knowing your liquid net worth is a great way to measure your financial progress from month to month for financial planning purposes. It gives you a bigger picture on how your finances are doing. Budgeting is great, but it cannot tell you how soon you can achieve financial independence, or how your financial situation is changing every month. It’s nice to be able to compare them every month, and understand why your net worth went up or down.
Maybe the stock market dipped, and you see that reflected in your retirement funds. Or, maybe you paid off a huge debt that’s been looming over your head, and you can now use that amount of cash to put towards something more important, like an emergency fund.
Why It’s Important to Have Liquid Net Worth
Having liquid assets you can convert into cash quickly in the event of an emergency is definitely a great way to provide your family financial security. Sometimes life can be unexpected, and a liquid net worth will allow you to get the cash you need when something expensive you didn’t anticipate happening actually happens, like getting a big hospital bill or expensive car repairs. Also, because liquid assets are easily accessible, it’s great to know what assets you can quickly liquidate in the event of an emergency when you don’t just have much cash lying around.
How to Improve Your Liquid Net Worth
So, you’ve calculated your total liquid net worth, and you don’t like what you see. Maybe you have a negative net worth. (Trust me, I’ve been there.) Don’t panic – you can improve it with a bit of work.
Pay Off Debt
The first thing you want to do is reduce your liabilities. So, if you have credit card debt, work towards paying it off for good. If you can, try increasing your monthly payments. Get your debts paid off to lessen this side of the net worth equation. By having less debt, you’ll have less liabilities in case anything happens. Stay on top of your payments, and always make a payment every month, even if it’s the minimum due. Here are some great articles on how to pay off debt quickly:
- Student Loan Debt: How to Pay Them Off Quickly and Painlessly
- How to Pay off Credit Card Debt Quickly
- How to Get out of Debt: We Paid Off $26,619 in 17 Months
Increase Your Savings
Another great way to increase your total liquid net worth is to pump up your savings. So, start putting away more into your savings account each month. I know this is easier said than done. If you are looking for ways to make some extra money, check out my post How To Make An Extra $1000 A Month Quickly. You can also boost your retirement savings as well to create more assets. Here are some great articles on saving more money:
- 5 Ways to do a 52 Week Money Challenge
- 10 Simple Rules to a No Spend Challenge
- 37 Easy Money Savings Challenges for 2023
- Truebill Review: Is it Legit?
- Trim Review 2023: Easily Lower Bills with this App
- How to Stop Spending Money You Don’t have
- Frugal Living Tips from the Great Depression
- 21 Simple Ways to Save Money on a Tight Budget
- How to Start Living Below Your Means
How Often Should You Check Your Liquid Net Worth?
Ideally, you want to check your liquid net worth at least once a month. According to Budgetable, knowing your liquid net worth allows you to gauge where you are financially. So, checking it at least once a month will be quite helpful. Also, if this number is something you want to improve, sometimes seeing where your stand each month will inspire you to save more, pay off your debit sooner, or find a side hustle to make some extra money.
What is Liquid Net Worth vs. Net Worth?
Your net worth is very similar, but instead of just counting the assets you can easily convert into cash, you include all of your assets, and then you subtract your liabilities from the total. So, basically it’s your total assets minus any liabilities.
What Counts as Net Worth?
Net worth includes all of your assets, both fixed and liquid. It doesn’t matter how much money it takes to convert an item or an account into cash, if it’s worth something, you can consider it part of your net worth.
How to Calculate Net Worth
To calculate your total net worth, you just add your total assets (both liquid and fixed) and then deduct your total liabilities.
Total Assets – Total Liabilities
Here’s a quick example of how to calculate your net worth. Let’s say you have the following assets:
Savings Account: 20,000
Checking Account: 5,000
And, you have the following liabilities:
Student Loan: $10,000
Credit Card: $1,000
So, your assets add up to $395,000 and your liabilities add up to $111,000.
Your net worth would be: $395,000 – $111,000 = $284,000
If you are looking for a net worth calculation, NerdWallet has a great one.
How Often Should You Check Your Net Worth?
If you’re checking your liquid net worth every month, it wouldn’t hurt to just go ahead and calculate your total net worth as well. If once a month seems like too much, perhaps try doing it every quarter, so four times a year.
As a finance fanatic, I cannot stress the importance of knowing both of these financial numbers. Having an idea of what both of these figures are can help you gain a better understanding of your overall financial picture. If either your net worth or liquid net worth isn’t where you want it to be, check out some of my other posts for making extra money and crushing debt. If you need help gauging how soon you can reach financial freedom, services like Personal Capital can help you with planning and investing.
Essentially, knowing what your total liquid net worth is can be quite helpful because it gives you an idea of your financial health. And, once you calculate yours, and determine that you need to improve your finances by setting a monthly budget, there are lots of great budgeting software options out there. Check out my post, Battle Of The Budgeting Software: YNAB Vs Mint to learn all about these two popular budgeting tools.
A forty-ish web designer/developer by day, a budget & financial fanatic by night. I’m a mom, wife, avid reader, and DIY enthusiast who’s tracking our journey to debt freedom. Read More