You’ve likely heard of the term net worth if you’ve been tracking your financial situation and improving your financial literacy. While calculating your net worth will give you a good snapshot of where you stand overall, understanding your liquid net worth will provide you with the best picture of your financial security. 

After all, how much of your assets could you quickly access if needed? Even those with hundreds of thousands or millions in assets may be cash poor and struggle to come up with funds in an emergency.

Read on to learn the difference between net and liquid net worth, how to calculate your liquid net worth, and ways to increase your liquid net worth.

What is Net Worth?

Before we jump into liquid net worth, let’s quickly define total net worth.

In simple terms, your net worth is the total value of your assets minus all your liabilities. In other words, net worth is what you own minus what you owe.

Assets could be anything you own that has monetary value, but typically assets are only included if they have significant value. So, for example, you may include vehicles and other possessions worth a decent amount in your net worth calculations. Other things included as assets are real estate, investments, and any money in checking/savings accounts. 

On the other hand, liabilities are any debts owed. Liabilities include student loans, mortgages, car loans, personal loans, and credit card debt. 

To calculate your net worth, add all your assets and subtract your total liabilities. Your net worth number can be either positive or negative, where a positive number indicates more assets than liabilities, and a negative number means you have more liabilities than assets.

If you have a negative net worth, you should focus on getting to a positive net worth number and then increasing that number over time.

What are Liquid Assets?

Understanding the difference between liquid and illiquid assets is the key to understanding the difference between general net worth and liquid net worth.

Liquid assets are cash or things that you can quickly convert into cash. Assets considered liquid include checking and savings accounts, bonds, certificates of deposit (CDs), mutual funds, stocks, and brokerage accounts. 

Conversely, non-liquid assets are more difficult to convert into cash. These include real estate, retirement accounts with restrictions and penalties for early withdrawal, vehicles, and other valuables like collectibles or jewelry. Essentially, anything that will take longer than a few days to gain access to the cash value is considered a non-liquid asset. In addition, certain volatile investments are also typically considered to be illiquid.

What is Liquid Net Worth?

Now that you know what liquid assets are, you’ve likely deduced that your liquid net worth is all your total liquid assets minus your total liabilities.

As with general net worth, your liquid net worth can either be positive or negative, but what that means for your financial health is murky. Of course, having a positive liquid net worth is good, and the higher your liquid net worth, the better you’ll be able to withstand financial hardship.

However, those with a low or negative liquid net worth may still be in good financial shape depending on the size of their emergency fund, the other liquid assets they have, and the type of liabilities they have. For example, an individual with a negative liquid net worth with a $50,000 emergency fund and $500,000 in mortgage debt due to rental properties is likely still in solid financial shape.

How to Calculate Your Liquid Net Worth

Let’s look at a hypothetical financial profile to illustrate how to calculate net and liquid net worth.

Speculative assets in this scenario include:

  • A primary residence worth $500,000
  • A rental property worth $300,000
  • Retirement savings worth $250,000
  • A brokerage account worth $100,000
  • Checking/savings accounts with $20,000

Hypothetical liabilities in this scenario include:

  • A primary residence mortgage of $300,000
  • A rental mortgage of $200,000
  • Student loans totaling $25,000
  • An auto loan of $5,000
  • Credit card balances of $2,000

In this scenario, assets total $1,170,000, and liabilities total $532,000 for a net worth of $638,000.

However, if we remove the illiquid assets of real estate home equity and retirement accounts, the liquid assets in this scenario total $120,000 for a liquid net worth of -$412,000.

As you can see, the liquid net worth is significantly negative. However, due to the large amount of money that is cash equivalents (about 10% of their total assets are liquid), an individual in this scenario is likely still financially secure. 

Why is Liquid Net Worth Important?

As you can see, negative liquid net worth is okay, depending on your assets and debts. 

Those with significant investments in retirement accounts and real estate may have a negative liquid net worth but are still likely secure financially because most of their debt and spending has gone toward things that typically appreciate and make more money over time. Yet, even if you’ve invested in appreciating assets, you’ll still want a hefty amount of liquid assets in case of an emergency.

However, suppose most of your assets are illiquid, and you have very few assets you can quickly liquidate. In that case, you may open yourself up to hardship should an emergency arise. Therefore, it is critical that you’re able to cover your monthly costs for a period should you suddenly lose your source of income.

The ability to shield yourself from financial hardship is why knowing your liquid net worth and the total number of liquid assets is essential. If your liquid net worth is negative, try to ensure that you have 3-6 months’ worth of liquid assets as a buffer in the event of loss of income. If you don’t have that emergency fund buffer, start building or increasing it as soon as possible.

Ways to Improve Your Liquid Net Worth

Less than satisfied with your liquid net worth? Luckily, there are several things you can do to start improving your liquid and overall net worth. Remember, creating financial security takes time, patience, and consistency. 

However, focusing on the following four areas of your finances will help move you in the right direction and closer to your financial goals. 

Build an Emergency Fund

If you don’t already have one, the first thing to focus on is building a healthy emergency fund. 

An emergency fund contains liquid funds that can cover necessary expenses in the event of financial hardship, such as the loss of a job or an accident. It would be best if you aimed to have 3-6 months’ worth of expenses saved up to help keep you afloat and avoid taking on debt, given a loss of income.

Start small with your emergency fund and work up until you have six months of expenses saved. Building your emergency fund should be one of your top priorities for financial security and will help improve your liquid net worth.

Lower Monthly Expenses

Another great way to improve your liquid net worth is to free up funds for savings and debt by lowering your monthly expenses. While it’s true that you can only cut so much from your budget, most have at least some areas where they can improve.

Start by tracking your spending for a few months and then see where you can cut costs. For example, can you lower your grocery bill, cut out unused or unnecessary subscriptions, and opt for free or inexpensive activities? Could your family survive with one vehicle, or can you live with roommates?

Whatever you can and are willing to cut will free up money that you can redirect to debt repayment and savings.

Reduce Debt

One of the most potent ways to increase your general and liquid net worth is to reduce debt. Every loan you have increases the liabilities you must account for in monthly payments and when building your emergency fund. 

While all debt count as liabilities, you must be especially wary of high-interest debt and debt accrued for depreciating assets like cars. As you reduce your expenses and build up your emergency fund, try to allocate as much as possible toward high-interest debt. Then, once you’ve repaid that debt, take what was your monthly payment for the debt and focus it on other obligations you have.

Eventually, your efforts will snowball, and your net worth will improve.

Increase Savings and Investments

Once you have a solid emergency fund and are well on your way to paying off high-interest debt, you should turn your efforts to saving and investing. While retirement accounts are an excellent vehicle for investments, diversification is always a good idea. Remember that retirement accounts are illiquid because they incur early withdrawal penalties, so you may also want to invest in a brokerage account you can access at any time. Bonds and CDs are other investment options that are usually liquid.

Final Thoughts

While calculating your net worth will give you an excellent overall picture of your financial situation, your liquid net worth paints the most accurate picture. 

However, just because your liquid net worth is negative doesn’t necessarily mean you’re in dire straits. Perhaps the most telling number is your total number of liquid assets. As long as you have a healthy amount of liquid assets on hand, you’ll likely be able to withstand hardships more than most.

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