Most of us have heard the term net worth, and we may have a clear understanding of what it means.
Net worth is the total amount of someone’s assets, this includes any cash they may have as well, minus any debt or liabilities they have.
Yet sometimes, you may be asked what your liquid net worth is. This is sometimes seen as a better way to understand someone’s current financial situation.
In this article, we will be discussing what liquid net worth is and how you can calculate it.
Liquid Net Worth: What Is It?
Liquid net worth, is the amount of money you have left once you sold all your liquid assets and paid off any debts that you have.
Therefore, liquid net worth places a higher priority on your assets and cash that can be converted into cash quickly with little loss in value.
The simplest formula you can use to calculate your liquid net worth is by subtracting your liabilities from your assets.
However, only your liquid assets are counted as part of your liquid net worth.
Liquid Net Worth Vs Net Worth: What’s The Difference?
The main difference between these two kinds of net worth is that liquid net worth will only consider liquid assets in its calculations.
Therefore, any assets that are not liquid, which are assets that could be sold quickly, are not taken into account when it comes to liquid net worth calculators.
As a result, net worth may be able to give you a better idea of your overall wealth.
Yet, liquid net worth gives you a better picture of how you would be able to cope with any unexpected events that may affect you finally.
Hence, liquid net worth can give you a clearer understanding of your current financial situation.
Does Your Liquid Net Worth Matter?
It is important to note that not all your assets are equal.
Therefore, if you happen to find yourself in a situation where you need cash as soon as possible, then your liquid assets are precious.
To have complete financial stability and freedom, you need to be able to survive unexpected or emergency events financially.
For example, if you are someone that suddenly has an emergency medical issue, and you receive a medical bill of $25,000.
You need to decide which is more important, the $25,000 in your savings bank account or the Kelley Blue Book card, which has an estimated value of around $25,000.
The money in your bank account is a lot more valuable as you know how much it is worth, and you can access it immediately.
Also using that example above, you may not be able to sell that car for the estimated value, even if you were told it could be sold for that much.
As a result, there are a lot of benefits of keeping an eye on your liquid net worth.
Also, by keeping an eye on your liquid net worth, it helps to motivate people to set up an emergency fund.
In that account, there should be a couple of months of living expenses covered in the worst case scenario, and you suddenly can’t work.
Usually, you will find that your net worth is higher than your liquid net worth.
However, your net worth is also tied up in assets that aren’t always liquid that could cause you problems when facing unexpected emergencies.
Types Of Liquid Assets
Now you know that liquid assets are important, we are going to go through some of the most popular liquid assets that you can come across.
There aren’t a lot of liquid assets. They are usually bonds and stocks, which are the main two examples.
Both bonds and stocks, you can sell very quickly and get your hands on the money in just a couple of days. Although, they are still going to be taxed.
Cash is also considered a liquid asset and cash equivalents. This includes money market accounts and saving accounts.
Which Assets Aren’t Considered Liquid?
It can be a bit of a gray area on which assets can be liquid or not.
This is because some assets can sometimes take a lot longer for us to get our hands on the cash than others.
A few of the traditional non-liquid assets include your car, retirement accounts and house.
This is because trying to liquidate your house could take several months, and no one may want to buy your home as well.
Selling a house takes a lot of time, and the amount of money you walk away with won’t be the exact value of your home. This Is due to taxes and realtor fees.
Alongside that, retirement investments such as 401K aren’t considered liquid.
This is because you redraw money from your 401K before you are 59 years old then you receive a 10% penalty, and you will be taxed on the money that you have withdrawn.
As a result, you end up withdrawing less money than you need.
Liquid net worth may not be well known, yet it is a vital way for someone to understand how much money they currently have.
You can improve your liquid net worth by reducing your liabilities and expenses. An emergency fund is a great way to improve our liquid assets as well.
To calculate your liquid net worth, you need to subtract your liquid assets from your liabilities. Usually, your liquid net worth will be lower than your overall net worth.
We hope this article has helped you to understand what liquid net worth is and how to calculate it.