Table of Contents:
- Liquid net worth meaning
- Liquid net worth vs. net worth
- Understanding liquid assets
- How to calculate liquid net worth
- How to improve your liquid net worth
- FAQs about liquid net worth
- The bottom line
As you grow on your financial journey, you may start working toward your personal finance goals and putting the proper strategies in place to increase your total net worth. You may have also learned that your total net worth is a good way to see a snapshot of your finances and whether they are in good health or need improvement. Wherever you are in planning your short- and long-term financial goals, understanding all aspects of net worth is a step in the right direction. So let’s get into the weeds and go a little further beyond total net worth because there we’ll find liquid net worth.
What does liquid net worth mean? Liquid net worth is the amount of cash or cash equivalents you have leftover after you have subtracted your total liabilities from your liquid assets. Liquid assets are cash or assets that can easily be converted to cash. In other words, liquid net worth is how much cash you have access to or can quickly get your hands on after your debt is accounted for. Positive net worth means that your assets outweigh your liabilities (how much money you owe). On the other hand, your net worth is negative if your debt is more than your assets, which may cause you to minimize what you owe before adding any extra expenses.
Liquid net worth meaning
- You might have searched for liquid net worth meaning: Liquid net worth is the amount of cash you have leftover after subtracting your total liabilities from your liquid assets.
- Liquid assets are cash or assets that can easily be converted into cash.
- While total net worth includes liquid and non-liquid assets, liquid net worth only focuses on liquid assets.
Now that you know how to define liquid net worth, you may ask yourself what is my liquid net worth? Before we cover how to calculate it, let’s talk about the difference between liquid net worth and total net worth.
Liquid net worth vs. net worth
Total net worth is calculated by subtracting your total liabilities from your total assets. The amount leftover is your overall net worth. This means that total net worth accounts for all of your assets, which consist of your liquid and non-liquid assets. However, liquid net worth doesn’t include your non-liquid assets and is determined by subtracting your total liabilities from your liquid assets.
Both are great tools to use to measure your financial health. Net worth gives you an entire scope of your overall financial position, while liquid net worth shows you a realistic idea of the amount of money you have available to cover your lifestyle expenses such as your day-to-day purchases, unexpected life events, emergencies, and any financial challenges that may come up. Since liquid net worth only focuses on a specific portion of your assets, it generally will be less than your total net worth. So, what exactly counts as liquid assets and non-liquid assets?
Understanding liquid assets
Understanding the difference between liquid assets and non-liquid assets can help with organizing your finances more effectively and calculating your net worth correctly. So what are liquid assets? You may already have an idea of the liquid assets that you have available to you, like the cash you have on hand or cash equivalents. However, liquid assets also include checking accounts, saving accounts, money market accounts, certificates of deposit (CDs), mutual funds, bonds, and stocks.
Non-liquid assets are assets that cannot be easily converted into cash, such as real estate, retirement accounts like individual retirement accounts (IRAs) or 401(k) accounts, cars, and other valuables such as jewelry and collectibles.
Let’s say you’ve planned a road trip with friends that you’ve paid for in full. Later that morning, you discover that the car you’re using for your road trip has a flat tire. You would probably want to have access to money that is readily available or assets that can easily be converted into cash rather than assets that would take you a while to liquify. It’s most likely out of the question to sell your home to pay for your car expenses or dig into your retirement savings to pay for your car while you’re not even at the retirement age. This is why liquid assets are so important to have available to cover unexpected expenses and emergencies. However, liquid assets, like a savings account or an emergency fund, aren’t the only essential factors when it comes to liquid net worth. In addition to having a healthy savings or emergency fund, you may simply want to have funds available for heftier life investments like putting a down payment on a new car, a new business venture, or even purchasing more stocks to diversify your investment portfolio.
Are stocks liquid assets?
As mentioned earlier, diversifying your investment portfolio may be another lifestyle or financial goal that you use your liquid net worth for. Investing in a mutual fund or simply purchasing stocks can not only increase your total net worth over time, but it can also positively impact your liquid net worth since stocks and mutual funds are liquid assets. Although there are many risks that come with investing in the stock market, it can also be beneficial as an investor, as it may help create a passive income, build generational wealth, help with saving for retirement, and potentially increase your liquid net worth. Now let’s move on to how to determine your liquid net worth.
How to calculate liquid net worth
To calculate liquid net worth, you will need to add up all of your liabilities or your total debt and subtract them from your liquid assets. The amount left over is considered your total liquid net worth.
Total liquid assets – Total liabilities = Liquid net worth
For example, let’s say you have $5,000 in your checking account, $15,000 in your savings account, and $3,000 in stocks. Also, you have $20,000 in student loans and $2,000 in credit card debt. To find your liquid net worth, you will add up all of your liquid assets, which in this case would be the balance of your checking and savings account and the value from your stocks ($23,000). Next, you will add up all of your liabilities, which would be your student loans and credit card debt ($22,000).
$23,000 – $22,000 = $1,000 in liquid net worth
In this scenario, your liquid net worth would be a total of $1,000.
How to improve your liquid net worth
There are many steps that you can take to improve your liquid net worth. A good goal is to increase your liquid net worth until it totals 3 to 6 months of your expenses. This way, you could use your liquid assets to cover your living expenses, if needed.
You may find a strategy that works best for the specific financial areas you are looking to improve, one that works best for your lifestyle and is aligned with your short and long-term goals. Let’s highlight a few steps you can take to improve your liquid net worth over time.
Step 1: Pay off your debt
Because interest on debt is usually greater than interest on assets, reducing your debt is a great first step in increasing your net worth.
Step 2: Create a savings account and emergency fund
While a savings account and emergency fund can go hand in hand, you may use these types of funds for two different things. A savings account may be used for larger purchases or certain goals, while an emergency fund may be funds that you don’t touch unless an issue arises. Paying yourself first, before allocating your funds to your bills, can go a long way. Setting money aside for future plans, emergencies, and other unexpected expenses can save you time and money when things come up, but can also add to your liquid net worth.
Step 3: Minimize your expenses
This is where things can get sticky. A healthy work-life balance is important, and we all can get overwhelmed by our responsibilities and paying bills. However, when organizing your expenses, you may find that you are spending more in certain areas than you were aware of (daily coffee or eating out, for example). Awareness of these things can give you the perspective to tweak your budget, potentially freeing up money to add to your savings or investment portfolio.
Step 4: Build your investment portfolio
Whether you are just getting started with investing in the stock market, interested in purchasing more real estate, or simply learning how much you need for retirement, expanding your investment portfolio sometimes can contribute to creating multiple streams of income. Although investing comes with many risks, riding the highs and lows of the market for the long term can have an impact on your return over time, which ultimately has the power to enhance your liquid net worth.
FAQs about liquid net worth
- Does liquid net worth include 401(k)s?
As mentioned earlier, liquid net worth only includes liquid assets. Since liquid assets are cash or assets that can be converted into cash quickly, a 401(k) doesn’t make the cut. If an individual is not of retirement age, it may be a little difficult to gain access to their retirement savings as quickly as they might need to. Therefore, a 401(k) would be considered a non-liquid asset.
- Does liquid net worth include debt?
Yes. As seen in our liquid net worth equation, liquid net worth is the sum of subtracting your total liabilities or total debt from your liquid assets.
- Does liquid net worth include stocks?
Yes. As stated above, stocks are considered liquid assets and, therefore, would be included in the total liquid net worth.
The bottom line
Although liquid net worth and total net worth are useful for measuring your financial circumstances, they are not the final say to determining your overall financial stability. While total net worth shows you a snapshot of where you stand financially, liquid net worth can be a great place to start to build your overall net worth. However, understanding the highs and lows that come with building your net worth is essential to creating a strategy or plan that works best for your short- and long-term goals.