As you’ve started your personal finance journey, you’ve likely heard the term total net worth and may have even put in place strategies to increase your worth.
Assessing your total net worth is a good way to see a snapshot of your finances and whether you are in good financial health or if your finances need improvement. But while net worth gives you a bird’s eye view, liquid net worth is the best way to measure your current financial situation.
Understanding all aspects of net worth is vital to ensure you meet your financial goals. And it can help you figure out opportunities for growing your net worth. Let’s dig in and find out more about why liquid net worth matters and how you can improve your liquid net worth.
What is liquid net worth?
Liquid net worth is the amount of cash or cash equivalents you have left over after subtracting 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.
Table of Contents:
- What is liquid net worth?
- Liquid net worth vs total net worth
- What are liquid assets?
- Why liquid net worth matters
- How to calculate liquid net worth
- How to improve your liquid net worth
- Increase your liquid net worth
- Frequently asked questions
Liquid net worth vs total 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.
Positive net worth means that your assets outweigh your liabilities (how much money you owe). On the other hand, negative net worth happens when your debt is more than your assets, which may cause you to minimize what you owe before adding any extra expenses.
Since liquid net worth only focuses on a specific portion of your assets, it generally will be less than your total net worth.
What are 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.
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.
Liquid assets example
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 other investments like putting a down payment on a new car, a new business venture, or even purchasing more stocks to diversify your investment portfolio.
Why liquid net worth matters
Having a positive liquid net worth can help you achieve financial freedom. 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.
Investing over the long-term can also increase your chances of growing your net worth. That’s because the longer you keep your money invested, the more compound interest you earn. With Public you can invest in a long-term portfolio to lock in your long-term investment.
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 as well as the total value of your assets. You then subtract your debt 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 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 financial goal is to have a liquid net worth of 3 to 6 months of living expenses in your bank account. This way, you can use your liquid assets to cover your living expenses, if needed.
There’s no one financial planning strategy that works for everyone. You may find a strategy 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. Debt also diminishes your total net worth and can make it harder to set money aside to invest for retirement. This is especially true if you have high interest rate debt like credit card balances or personal loans.
However, in some cases it might make sense to focus on investing as well as paying off your debt, especially if you have longer-term debt like student loans, car loans, or a mortgage.
Step 2: Create a savings account and emergency fund
While a savings and emergency fund can go hand in hand, you may use these types of funds for two different things.
A savings account, such as a high-yield 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 preparing your retirement plans, expanding your investment portfolio sometimes can contribute to creating multiple streams of income.
For example, dividend stocks can build up your portfolio and potentially increase your returns through passive 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.
With Public you can quickly withdraw your funds, which increases your liquidity.. This way you can build up your investment portfolio and not miss out due to a lack of liquidity.
Increase your liquid net worth
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 security. Being part of a community of like-minded investors like Public can also help you increase your net worth as you can learn from others about ways to grow your wealth.
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 financial goals.
Frequently asked questions
What is the difference between liquid net worth and net worth?
Liquid net worth is the amount you have in cash or cash equivalents after you’ve deducted your liabilities from your liquid assets. Net worth includes all of your assets, including non-liquid assets like real estate or retirement accounts.
What are the advantages of liquid net worth?
Having a large liquid net worth makes it easy to quickly access large sums of money when you need them than cash that is tied up in fixed assets like real estate or cars.
How do you measure liquid net worth?
You can measure your liquid net worth by taking the total sum of your liabilities such as debt and subtracting it from the total sum of your liquid assets, such as your savings, cash, and stocks.
Does liquid net worth include stocks?
Liquid net worth includes stocks, as stocks are considered liquid assets since they can easily be bought and sold.