It crossed my mind that maybe there are more people who do not know, so I decided to make a post about liquid net worth and its definition.
Most of us are pretty familiar with the term “net worth”.
Referring to the total amount of all of our assets, including cash and property, minus any debts or financial obligations we’re owing.
But when it comes to liquid net worth, there’s less clarity around the term.
Even though it can be used to better assess an individual’s financial situation.
In this post, I’ll give you the run-down on everything you need to know about liquid net worth: what it is, why it’s important, and how to calculate your own.
What is liquid net worth?
Let’s imagine that everything you own of financial value – the things that contribute to your net worth – were suddenly sold for cash (or, financially speaking, liquidated).
Your liquid net worth is the total value of your assets if they were all put up for sale in this situation.
We should probably care more about our liquid net worth. Because even if a person’s net worth is fairly high, if some of their assets aren’t easily accessible, in the case of an emergency, their liquid assets are suddenly incredibly important.
What counts as a liquid asset?
Not everything you own is considered a liquid asset.
When you’re calculating your net worth, assets like your home, certain investments or for example a car can be considered. But they’re generally seen as non-liquid because they wouldn’t produce immediate cash if you ever needed it.
Things that do count as liquid assets include stock and bond investments. As you can sell them in an emergency and get the money from them almost immediately.
(You should bear in mind that you’ll still be taxed on these, which you’ll need to consider when calculating your liquid net worth.)
Nobody can really decide exactly what your liquid net worth encompasses. Some people think that the term only refers to the assets you can get money back from selling right away. While others still include assets that would take longer to sell, but devalue them by 20 or 30% accordingly.
This accounts for the fact that in a situation where a person would have to sell quickly, they might not be able to sell to the full value of the asset.
Why should you keep track of it?
As I’ve already mentioned, it is important, because it calculates the total value of your assets if you had to up and sell them all immediately.
This allows you to evaluate your true financial security, which your net worth doesn’t quite achieve in doing.
Evaluating your liquid net worth might be an eye-opener enough for you to consider creating an emergency savings fund. Emergency funds are one of the best liquid assets that you could fall back on in a time of financial emergency.
You should already have an emergency fund in place – but that’s not to say that everyone does!
How to calculate liquid net worth?
Don’t fret – you’re not going to need to overcomplicate things to calculate it.
You simply need to total the value of your liquid assets (adding in your non-liquid assets if you prefer, but deducting a 20 or 30% fee), then taking away your liabilities.
Remember to include all of your liquid assets in your calculation to give yourself the most accurate figure.
Consider assets/investments like:
- bonds and stocks
- other cash accounts
- physical investments like jewelry and art (although take into account that these can rise and fall in value)
- and, if preferred, your home and car.
Your liabilities are any debts or other financial obligations that take your money away at a fairly consistent rate.
These include mortgage repayments, personal loans, student loans, credit cards, auto loans, and any other type of debt you might be owing. Add them all up and minus the total cost from the total value of your liquid assets.
That’s about as difficult as it gets.
If you want a more organized way to calculate your liquid net worth, there are a few apps you can use to simplify the process.
But really, it’s not too difficult to figure out on your own, and you can keep things in check with a simple Excel spreadsheet.
Improving your LNW
There are several methods of improving it if you want to live in increased financial security. These include:
Wipeout your liabilities
Perhaps the most obvious method of all is to pay off your liabilities as quickly as possible.
This will reduce your liquid net worth. Simply because there’ll be less to minus from the value of your assets when you’re calculating the figure.
Work out whether it’s possible to make more payments towards certain debts, like your mortgage.
Try to make payments on a bi-weekly basis instead of once monthly.
Consider investing in the stock market
I get it, the stock market is a scary place. But you’re will increase the total value of your liquid assets if you spread your investments over several stocks and bonds.
While stocks can feel like a bit of a gamble if you invest wisely (do not speculate, and treat it long-term), you’re could see good returns.
As I mentioned previously, if you don’t already have an emergency savings fund, it’s time to get one ASAP. Aside from cash and stocks, an emergency savings fund is one of your most valuable liquid assets. Add to it regularly for peace of mind.
Review your expenses
Some liabilities, like certain types of debt, are impossible to do much about.
But other debts and expenses are flexible, and you might be paying more for them than you should be.
Take a look at how much you’re paying for everything you take out a direct debit for. Including gym memberships, online streaming subscriptions or phone contracts. Then compare deals online and see if there’s a better one out there.
Do the same for your mortgage, car insurance, and so on.
Hope this helped!