Liquid Net Worth – What It Is, How To Calculate, Tracking & More – In assessing your short-term and long-term financial goals, it may be smart to compare the value of your assets to that of your liabilities. This is when we talk about net worth. With this value, you have a basis for determining whether or not you should reduce monthly spending, set up a retirement savings account, or adjust your tax withholdings.
There are two primary types of net worth. The first is total net worth and the second is liquid net worth. The aim of this article is to define liquid net worth and also show you how to calculate it. So let’s start with the basics.
What Is Liquid Net Worth?
Liquid net worth can be defined as the amount of money you have in cash. It can also be your cash equivalents after you have deducted your liabilities from your liquid assets. Liquid net worth is much like net worth, only that it does not account for non-liquid assets like real estate or retirement accounts.
Understand that your total net worth is affected by both liquid and non-liquid assets. What this implies is that you’ll have to add up the value of all your assets. These will include your vehicles, property, retirement accounts, securities, cash, and anything else of monetary value. Then you’ll subtract the value of your liabilities from this sum. In a situation where your liabilities exceed your assets, you’ll have a negative net worth. On the other hand, if your assets have more monetary value, you’ll have a positive net worth than your liabilities.
Liabilities are financial debts that one is expected to pay. It may include student loans, car loans, credit card balances, taxes and mortgages.
Why is Liquid Net Worth Important?
Liquid net worth is considered to be important because it helps you in gauging how much money you have available to spend, save or invest.
The liquid assets that are used for calculating your liquid net worth should be those which can easily be converted into cash. These would cover stocks and bonds and other investments like certificates of deposit (CDs).
If you have a positive liquid net worth, you have the ability to spend more money. On the other hand, if it is negative, you’ll have to work on saving or investing in a bid to make up a deficit and return yourself back into the black.
Most people strive to make their liquid net worth to be higher than when they started out each year.
As such, it is recommended that you use liquid net worth as a measurement in helping you reach your goals.
What Are Liquid Assets?
The term liquid asset represents any cash or assets which can be readily converted to cash. Examples of liquid assets include the following – cash, money market accounts, checking accounts, savings accounts as well as any other securities which can be easily converted into cash.
What Are Non-Liquid Assets?
Non-liquid assets refer to things that you cannot turn into cash immediately. These things can be used for emergencies, but they are not as good a way of saving money. This is because it takes time before the emergency happens. Here are some of the examples of non-liquid assets – home car, as well as other belongings like furniture or appliances.
Understand that, you can borrow money from home equity or sell your car to have liquid assets.
Non-liquid assets as well as other income-producing assets would be included in your net worth, but not in your liquid net worth.
How to Calculate Liquid Net Worth
To calculate and determine your liquid net worth, take the total sum of your liabilities and subtract that from the total sum of your liquid assets. Note, that some liquid assets may come with a liquidity discount. As such, you’ll want to factor this into the equation when calculating your final liquid net worth.
Basically, liquid assets are cash or cash equivalents that can be easily and efficiently converted into money. You will have to subtract your liabilities from these assets when calculating your liquid net worth. When it comes to comparison and budgeting purposes, even though, it may also be effective to calculate your net worth. As such, you’ll be able to view your financial situation from a holistic perspective.
Tips for Growing Your Net Worth
Want to grow your net worth? If yes, here are some net worth growing tips that you will find useful:
- Do you have a negative net worth? Are you simply looking to build your total assets? If so, there are several steps you can take in securing more money. One of such steps is “Budgeting”.
- The second is finding a financial advisor that can help you sort your net worth issues out and help you grow it.
- Invest more – invest enough money that the returns on investment will outweigh the costs associated with them over time. You can invest in stocks and bonds.
- Reduce your expenses so you have more money to invest.
- Review and reduce your liabilities. Here you have to work on paying off what you owe and get those debts out of the picture. This method will take time to generate results say like few months. Except you are aggressively trying to pay off your debts. But once you are able to pay them off, this liquid net worth strategy will be really effective.
Tracking Liquid Net Worth
Liquid net worth covers assets that are easily converted to cash, like savings account balances and mutual funds.
Also to be included should be the value of your home in this calculation. That is if you are going to use it for a down payment on another property.
Simply put, you want your liquid net worth number (including any equity from your home) to be at least twice the amount you want for a comfortable retirement.
If you want to judge your financial stability, then keeping track of your net worth is key. Growing your liquid net worth helps you achieve financial freedom early on in life. Since your liquid net worth determines the funds you have in time of an emergency, it is essential to keep track of it and grow it as much as you can to be financially independent early on in your life. Additionally, having a good liquid net worth will enable you to handle any financial crisis like the loss of a job without being put in a tight corner.