Easy Steps to Calculate Liquid Net Worth
Have you ever wondered what you would do in a pinch should your business ever go under? Either you’ve been wondering about this, or you just stumbled upon this article. In either case, buckle up because learning about your liquid net worth is something that everyone can benefit from. Financial liabilities and unforeseen crises are horrific situations to find yourself in. Hence it’s better to prepare in time and learn about the things that matter than to be left penniless on the time where it counts the most. This is exactly what your liquid net worth is going to help you with.
What is Liquid Net Worth?
You’ve heard of net worth, but what is liquid net worth? Well, all the money that you have left after selling off all your liquid assets and paying off your current financial liabilities is your liquid net worth. Simply put, it’s how much you are worth monetarily after all your liquid assets have been sold off and your current liabilities are paid.
Alright, we’re going to do some simple math here. You can determine your total liquid net worth by subtracting your current financial liabilities from your total liquid assets. Whatever cash is left behind; is how much anticipated money you will have in the end in times of a financial crisis.
You must’ve also heard of the term ‘net worth’, and the difference between your net worth and liquid net worth is pretty close. Your net worth is the total value of all of your assets after subtracting all your liabilities (long-term or short-term) from it. Whereas liquid net worth only concerns itself with your liquid assets and only accounts for your current liabilities. What does liquid asset mean, you ask? We’ll get into it later in the article, so stick around. WealthyNickels sums up the concept of liquid net worth really well;
“Your liquid net worth represents the amount of money you could easily come up with on short notice without jeopardizing your ability to pay your immediate bills.”
Why is it Important?
Often time we find ourselves in unexpected predicaments. Something taxing, such as paying off a loan, losing your job, or an unforeseeable medical treatment, could come up. How do you properly budget your funds then? And how do you know if you have enough money to last yourself through this specific quandary? If your car broke down today beyond repair, will you have enough resources to buy yourself a new one?
Liquid net worth and net worth usually sound very alike. The difference between both, as explained above, might not seem huge, but both give you metrics about entirely different things. Think of it as a long-term and short-term safe deposit. Net worth is that long-term safe deposit you should not rely on because it means selling everything you possibly own as an asset. Whereas your liquid asset is more likely the money that is reliable. It is the money you could have at hand currently, should you find yourself in the middle of any crisis. It only accounts for you selling off your liquid assets.
Having a good grip and understanding of how much liquid net worth you have could help you properly plan things long before they have even happened. This will also end up providing you relief and help in making your life’s financial decisions. Once someone understands the limit of how much money they can allow being spent as damages or any other expense, their risk assessment improves tremendously.
This will ultimately also help you determine how much money you would have left after all this is done and over with. And if this can help you support and sustain yourself and your business any further.
Know Your Liquid Assets
Let’s finally talk about your liquid assets now. What are liquid assets? They’re any assets at hand that you own that can be easily converted into money. There are various forms of this type of asset. They can exist in the form of loose cash or stocks or bonds.
Your total liquid assets say a lot more about your ability to blaze through a financial liability than your total assets do. Learning about your liquid assets is of paramount importance. You can even prepare for some liquid assets in time for yourself, so you may extract them back in time of need. This saves one from shuffling hopelessly in times of need.
Here are some time types of liquid assets that you may have on your hand right now that you may recognize:
- Loose cash on hand
- Money stored in a saving or checking account
- Short term certificates of deposits
- Individuals stocks
- Money market accounts
- EFTs and mutual funds
- Bonds and bond funds etc.
Liquid assets like bonds or stocks can be easily sold off and have cash at your hand in as little as three days or even less. Equipping yourself with liquid investments like these could turn out to be a cornerstone for you in difficult times.
Non Liquid Assets
Now on to the opposite of liquid assets. These are assets that typically take a lot longer to be sold off or converted to cash. Hence these cannot be counted to be on hand at all times. This is because there is no reliance on when you will get back money for them. This could include your real estate properties, your car, or other hefty investments like that that usually take a longer period to sell.
This is why some of these non-liquid assets cannot be considered liquid:
Typically selling off a real estate property could take a good 3-4 months before finding a reasonable buyer. Even then, the actual cost you receive after the entire transaction is made is not enough. This is because a lot of it gets covered in the realtor’s commission fee, taxes, and other moving fees. Whereas if you try to avoid this delay and push to make a quick sale, you’ll end up probably getting a bad deal or have to sell it at a discounted price.
Personal Property Items:
Other personal belongings that you may own, such as a car, your jewelry, furniture, or any other electrical appliances, etc., are also considered non-liquid. Selling a personal property can never be counted on as you never know which transaction would be instantaneous and which one would take weeks or months. Plus, selling in a hurry could also result in selling at a bad price.
Just like the previous two, retirement accounts can also not be considered liquid. There are very limited situations that allow you to withdraw from your retirement accounts before your actual retirement. Even then, you would be charged on top with extra taxes, a penalty percentage charge too (around 10%).
We mentioned ‘current liabilities’ before. Let’s touch on that for a bit. According to Investopedia, “Current liabilities are a company’s short-term financial obligations that are due within one year or within a normal operating cycle.” Current liabilities, as apparent from the name, only consist of your debts or other liability expenses that you are facing currently or in the near future.
This helps us understand both sides of your liquid net worth. It doesn’t comprise your liquid assets only but also depends on subtracting all your current liabilities from it. Only then do you get an idea of if you have enough money left to weather everything afterward.
Your current short-term liabilities could be in the form of a variety of different things. It could be your due mortgage, car payments or installments, personal debts, student loans, taxes, credit card bills, etc.
How to View Your Liquid Net Worth
Your liquid net worth based on your liquid assets is whatever you make it out to be. Though typically, it is better to only consider the items that could be converted to cash from as little as 24 hours to 7 working days. Anything else would be a non-liquid asset, but it doesn’t hurt to count them in as well if you’re trying to get an idea of your overall financial position.
If you plan to include your non-liquid assets in your liquid net worth, it would be more advisable to shave off about 10-30% of the total market cost of that asset, i.e., your house, car, or retirement account. This is to stay practical and cautious about the ever-fluctuating circumstances and rates. Plus, tons of fees could also be deducted as taxes or other commissions.
Counting your non-liquid assets while viewing your liquid net worth does give you a good look at how you would fare in a big financial emergency. However, assets like cars or houses add little value in the grand scheme of things since they are not immediately sellable. Hence it is more advisable to not include them at all.
How to Calculate Liquid Net Worth
Alright, enough talk, let’s get down to business. So far, we’ve pretty much already covered how you can calculate your liquid net worth. It is the difference you get after subtracting all your current liabilities from your liquid assets. The formula looks like this:
Liquid Net Worth = Liquid Assets – Current Liabilities
The real trouble here is identifying and listing down all of your liquid assets. We suggest you start with a spreadsheet and make a list of all of your liquid assets. Next, formulate a list of all of your current liabilities that need to be paid off. Find out the total for both, and make the subtraction. You could also add your non-liquid asset(s) to your liquid assets total if you plan on selling something from that category as well.
The total liquid net worth left after all these calculations could turn out to be lower than you expected, which is great because you now already know that. This will help you prepare in time for when you could actually need that money.
Different Ways to Increase your Liquid Net Worth
Lastly, now that you’ve learned a bit about how important liquid net worth can be let’s look at some efficient ways in which you can actually end up increasing it quite nicely.
The easiest solutions are often the most obvious ones. In order to have more liquid assets at hand, you need to start to reassess and reevaluate your spending and expense pattern and trim it down a bit. Start by budgeting all your necessary costs that cannot possibly be cut down. Then move towards the ones you can and work on setting a particular allowance for yourself to spend every month.
Pay Off Liabilities:
We realize that this is obviously not as easy as it sounds. But we also urge you to start actively trying to list down all your current liabilities that you owe, maybe in the form of debts, or loans, or credit card bills even. Getting rid of these bigger costs that always loom over your liquid net worth would actually set it free once you successfully pay them off.
Improve Income Opportunities:
There is no true way to start increasing and adding on to your liquid net worth unless you start earning more. This is why it is always smart to always be on the lookout for alternate ways to make more money. Sure, you’re already working on a 9-5. Still, a side hustle could provide you with financial independence and a sense of safety. You could also look to invest in the form of business that could turn out to be a passive form of income for you. Properties are a great route for that.
Liquid net worth does not have as much extensive street cred as net worth, but this measure is extremely helpful. Find a way to balance both your liquid assets at hand and good non-liquid investments that could also double as a source of income. We hope this article helped you reevaluate some of your personal assets and start planning for things in advance since it’s always better prepared than sorry.
What to calculate my liquid net worth?
Liquid net worth is calculated by simply adding up all of your liquid assets and removing all of your liabilities.
What is my liquid asset?
Well, it really depends on how you define liquid net worth. For most people, assets such as stocks, bonds, cash, savings, mutual funds, checking accounts, ETFs, etc., are considered liquid assets.
Does liquid net worth include my house?
Not really. Generally speaking, liquid net worth does not include your house. Even in the buyer’s market, you have to wait at least a month until you can get the cash for your sold house. Fees, taxes, and other transaction costs will also cut into the amount you walk away with.
Is a retirement account like a 401K liquid asset?
No. Any retirement account such as IRA or 401Ks is not liquid. If you are under 59.5 years of age, you have to pay the penalty if you withdraw some amount from your funds.
Is my car a liquid asset?
Generally speaking, cars are not liquid assets. You can sell it easily, but its sale can also take time. It’s also not always possible to know how much amount you will get for your car.