Liquid Net Worth: How To Calculate and 8 Ways To Increase Your Liquid Net Worth
If you own any assets, you have a net worth, which is the value of all your assets minus your liabilities. Your assets could include cash, investments, and property. Your liabilities might include credit card debt, mortgage, car loans, and student loans.
Your liquid net worth is significant because it represents how much money you would have if you had to sell everything immediately and pay off all your debts. Most people’s liquid net worth is much lower than their overall net worth because they have significant non-liquid assets, such as a house or a retirement account.
Establishing and understanding your liquid net worth is an integral part of making sound financial decisions, as well as prepping for the future. It’s a good idea to calculate your liquid net worth at least once a year so that you can track your progress over time.
What Is Liquid Net Worth
In simple terms, it’s the value of your liquid assets minus your liabilities. This number can give you a quick snapshot of your overall financial health.
While your total net worth includes your liquid and non-liquid assets, liquid net worth is a more accurate measure of your short-term financial stability. This is because it only considers the money you have readily available to cover unexpected expenses or opportunities.
Net Worth vs. Liquid Net Worth
Calculating your liquid net worth requires an alternative approach to the method used to calculate total net worth. Instead of summing up all assets and subtracting liabilities, one should only include liquid assets while still deducting any existing debts from that amount.
As a result, it is most likely for liquid net worth to be smaller than total net worth.
How To Calculate Liquid Net Worth
Calculating liquid net worth is a great way to get started if you’re trying to get a handle on your personal finances. Now that you know how to define liquid net worth, It’s simple to do and only takes a few moments to complete.
Liquid net worth = Total liquid assets – Total liabilities
To calculate liquid net worth, start by taking inventory of all cash and bank accounts you currently have, such as checking and savings accounts, brokerage accounts, money market accounts, I-Bonds, T-Bills, and other cash equivalents. Look at the balances in each account, and then add them together – that’s your total liquid assets.
To complete this process, look at any loans or debts you’re currently carrying, such as credit card debt or student loans, subtracting the total figure from your existing liquid assets. This will give you an accurate picture of your overall financial health!
What Are Liquid Assets
To calculate liquid net worth, we need to include only liquid assets. Of course, the definition of liquid assets may differ based on your circumstances.
For example, if you have retirement accounts, ideally, you would not count them as liquid assets due to age restrictions and tax penalties. However, you could technically withdraw the money by paying taxes and the early withdrawal penalty to convert your individual retirement accounts (IRA) into a liquid asset.
You can take out your Roth IRA contributions anytime and for any reason, with no tax or penalties imposed. If you are over 59½ and have held your account for at least five years, you can access both contributions and earnings from it without having to pay any taxes or penalties.
For those who are below 59½ or don’t satisfy the five-year provision, exemptions exist for taking out money to pay for essentials such as a first home buy, college bills, and other scenarios.
Similarly, investing in real estate is often touted as one of the best ways to create generational wealth. But is real estate considered a liquid asset?
Specific crowdfunded real estate deals have a lock-in period.
Hard money lending is an excellent monthly income investment, but you loan the money to a house flipper or BRRRR project for a fixed duration. You will only get your money back if the BRRRR investor refinances the house or the flipped house is sold.
You can’t sell a rental property with tenants at a moment’s notice due to local laws and tenants’ rights.
However, if you have a vacant property, you could sell it at a fire sale price much lower than the market value. Many properties with tax liens are sold at auctions. Investing in tax lien properties is one of the ways to acquire real estate with little money.
Hedge funds generally have a lock-in period, and it is harder to liquidate hedge funds vs. mutual funds. Mutual funds typically settle funds in 3 business days after the sale as long as the fund or ETF is actively traded.
Popular Vanguard funds or other index funds are highly liquid due to their high trading volume. Investing in the S&P is also popular and one of the most liquid funds.
529 accounts were not considered liquid assets. However, with the passage of SECURE Act 2.0, individuals can roll over and transfer up to $35,000 from their 529 college savings accounts into a Roth IRA without incurring any taxes or penalties, subject to the annual limits for Roth contributions.
Fixed-income instruments could have lock-ins. For example, you can’t cash out a CD before a specific period without penalties. Similarly, I-Bonds are for five years but can be cashed out after a year with a three-month penalty. Treasury bills, on the other hand, are highly liquid.
Personal Capital offers some of the highest savings rates today, with 4.1% APY for standard accounts.
Depending on the type of alternative investments, you could convert non-liquid assets to liquid assets based on a discount factor.
Cryptocurrency investments such as Bitcoin have a global liquid market operating 24/7.
Investing in art is generally reserved for art connoisseurs or billionaires, which makes it harder to sell at short notice due to a limited buyer pool.
You can sell gold, jewelry,and precious metals at a discounted price in pawn shops.
Ideally, cars, boats, primary homes, and vacation homes are not considered liquid assets.
Based on the above examples it is possible to convert non-liquid assets into liquid assets by incurring a loss. So if you have non-liquid assets, ensure that you either include them with an honest discount in your liquid net worth calculations or leave them off.
Why Is It Important To Know Your Liquid Net Worth
Knowing your liquid net worth is one of the most important steps in managing your personal finances. Liquid net worth measures all the assets you can access and convert into cash without penalty, such as checking and savings accounts, stocks, mutual funds, bonds and investments, minus any liabilities like loans or credit cards.
Your liquid net worth matters just as much as your total net worth.
The calculation indicates the financial capacity you can access immediately. It’s often better to know and manage this amount rather than an illiquid net worth number because illiquid assets such as real estate aren’t always liquid enough to access in a pinch and may require extensive red tape to do so.
Most Americans have a large portion of their average net worth tied up in their primary home, which could be unproductive usage of money. Instead of a McMansion, consider if a starter home could be more fiscally responsible.
Similarly, America is the land of entrepreneurs. However, having a sizeable net worth tied up in a brick and motor business could be risky to your financial health.
To be clear, neither real estate nor businesses are bad assets, but calculating your liquid net worth can help highlight the risks in your asset allocation.
Being informed on liquid assets helps you draw up a financial plan suitable for your current circumstances, allowing you to make smarter money decisions.
It is essential to pay attention to your liquid net worth because it reflects financial health for the here and now. A low or negative net worth may mean that unforeseen expenses could leave you in trouble. It is time to implement a budget if you have a negative liquid net worth.
A simple 50/30/20 budget rule can be a good starting point.
You can use free software like Personal Capital to monitor your net worth and stick to a budget. Compared to other budgeting apps, Personal Capital doesn’t need you to do the tedious task of setting up a budget. After you link all your accounts together, it looks at your current spending and creates a budget for your lifestyle. You can then modify it as needed. Personal Capital also has features to analyze your retirement accounts, eliminate fees, and track your liquid net worth and cash flow.
Caring for your liquid net worth is about more than tracking numbers: it’s about preparing for future security by keeping some of your financial resources fluid and available should unexpected needs arise.
Pros of High Liquid Net Worth
Having a high liquid net worth has some fantastic benefits.
- You have the financial flexibility and the ability to pay for large purchases quickly.
- Having a large cash balance also acts as a security blanket in case of unexpected expenses.
- A considerable amount of cash can be an excellent hedge against financial market downturns.
- Having a high liquid net worth also helps you take advantage of opportunities that may arise unexpectedly, like purchasing land or launching a business, or a down payment on a cash-flowing rental property.
No matter your goals, having a healthy liquid net worth is critical to achieving financial freedom.
Cons of High Liquid Net Worth
One of the biggest cons of high liquid net worth is that cash and other cash equivalents are not income-generating assets. Cash on hand can be a poor hedge against inflation.
Safe investments should form a part of your portfolio, but they underperform other assets in the long run.
Ways To Increase Your Liquid Net Worth
Increasing your liquid net worth can be achieved by taking a few simple steps.
Get a Handle on Your Current Financial Situation
Just telling yourself that you want to save money for a vacation or a new car is usually never good enough. It is best to write financial goals and keep them in plain sight. When someone writes down their goals, they are more likely to achieve them.
List your assets and liabilities and map them to your goals. It will provide you with the necessary motivation to tackle your financial challenges.
Build an Emergency Fund
If you don’t already have a solid contingency fund set aside in FDIC insured checking accounts, you may want to start building one.
Keeping aside enough money to cover three to six months’ worth of expenses is a great step towards building your liquid net worth.
Having an emergency fund can be a lifesaver when you’re faced with unanticipated bills, like the loss of employment or reduced work hours. It’ll help keep your credit card debt at bay and prevent getting behind on payments.
In preparation for an upcoming recession, increasing your emergency fund to one year of living expenses.
Pay Down Your Debts
The simple fact of today’s financial world is that the vast majority of us have a debt of some type. Debt comes in many forms, and there are vast differences in the kind of debt we have.
Some kinds of debt occur as part of life and are extremely difficult to avoid. It includes student debt (college loan debt), car loan debt, or mortgage debt. Most people will lack the financial resources to afford college, an automobile, or a home without taking on debt. This kind of debt is normal, acceptable, and manageable.
Fiscal responsibility means making your payments on time. As such, it is incumbent upon you to ensure that you keep an eye on these debts, refinancing for lower interest rates whenever possible, and never miss a payment.
Other consumer debt — like credit card debt — can be more problematic. In these cases, you make purchases with your credit cards and cannot pay off your credit card debt. Balances on credit cards are high-interest debt, as credit card companies make their money by charging you high-interest rates.
In such instances, your monthly expenses will soar, and you may be unable to save money. One of your chief goals should be to pay down this debt and reform your spending to avoid going into credit card debt in the future.
After having an adequate emergency fund and paying down high-interest debts, focus on goals such as saving or investing.
Once you have determined how much money you can save each month, consider setting up an automatic transfer from your paycheck to a savings account. This will ensure the money goes into savings automatically, so you don’t have to think about it.
Figuring out how to invest money can be overwhelming, especially if you’re a beginner. Knowing where to start, what to invest in, and how much risk you’re comfortable taking on is challenging.
Several income-producing assets have different returns, risks, and volatility. Before investing, take a step back, ask yourself “why,” and define your financial goals.
Learning how to start investing in stocks should be easy with the advent of low-cost index funds.
There are several ways to invest in real estate. One can get passive income from real estate by becoming a landlord. Because of a small supply of available rental homes, rental prices are increasing. Understand the real estate metrics used to evaluate a rental property. Since one must maintain rental homes, understand the basics of being a landlord.
Many investors who like real estate don’t want to be house flippers or a landlord but want to invest in real estate. Investors can buy real estate investment trusts (REITs) that invest in real estate.
You can buy publicly-traded REITs like VNQ using no-fee platforms like M1 Finance for as low as $10.
If you have a negative net worth, you must increase your income.
Create additional sources of passive income based on your high-income skills at your day job or monetize your hobbies. Setting up a website or blog is considered active initially because you need to produce content. But, the internet provides infinite leverage in terms of audience. The content created once can be sold repeatedly, with no extra cost.
If you are interested, check my guide on how to start a website in 10 minutes, with examples of content you can focus on creating.
Track Your Liquid Net Worth
“What gets measured gets managed.” Famous words by management guru Peter Drucker still ring true.
Once a month, look at your overall net worth and calculate your liquid assets.
Invest in Yourself
Your strong financial position should be used to invest in yourself.
These steps will undoubtedly help you make the most of your resources and build a secure financial future. Whether you improve your human capital at work to get a pay raise or invest the money to start a side gig, you can decide how to invest in your future.
Common Mistakes To Avoid When Trying To Increase Your Liquid Net Worth
Ignoring Goal Setting
One of the most common mistakes people make when trying to increase their liquid net worth is not setting realistic financial goals. It can be tempting to dive into investing or saving without understanding what you’re getting into. Still, it’s crucial to have a plan that accounts for your current financial situation and future goals.
Not Understanding The Investment
It’s also easy for people to get caught up in quick-fix methods, like taking out loans or spending money they don’t have on investments that may not be right for them. This can lead to debt and financial hardship down the line.
Real estate investors are often guilty of using excessive leverage to grow their portfolios at an accelerated pace. Dave Ramsey had amassed a $4 million real estate portfolio at 26 when he declared bankruptcy. His cash flow quadrant was based on his life experiences and why he is vehemently against any debt, even for a primary home.
Finally, it’s essential to focus on having a diversified portfolio of investments to secure your liquid net worth rather than focusing too heavily on one asset. Understanding the risks involved in any investment will help you secure your financial future.
By following these tips and avoiding common mistakes, you can build a solid, liquid net worth and set yourself up for financial success. Achieving this requires discipline, knowledge, and strategic planning – but with patience and commitment, it’s possible to increase your liquid net worth and secure a better financial future.
Should You Care About Your Liquid Net Worth
Your liquid net worth is significant because it represents how much cash you have to cover unexpected expenses or take advantage of new opportunities. To compute your liquid net worth, deduct all of your liabilities from the sum of your liquid assets.
A high liquid net worth has many benefits, including financial security, peace of mind, and the flexibility to make significant purchases without debt. There are several ways to increase your liquid net worth.
- Start by assessing your finances to establish what is important and prioritize your needs.
- Pay off high-interest debt. Credit cards, student loans, and other forms of debt have high-interest costs, and it is better to pay them down as soon as possible to improve your liquid net worth.
- Re-allocate funds towards savings and investments to help build your liquid net worth.
- You could also look for different ways to save money; for example, setting up an automatic transfer from each paycheck towards a savings account.
- Consider increasing your income by exploring various types of income. Look into monetizing a hobby by starting a side gig. For example, if you are interested in something like photography, turn it into a profitable way of making extra income.
- Finally, track your financial progress at regular intervals to get familiar with your financial standing and ensure you’re on track to investing in yourself for the future.
If you don’t know your liquid net worth, now is the time to calculate it and take steps to improve it.
John Dealbreuin came from a third world country to the US with only $1,000 not knowing anyone; guided by an immigrant dream. In 12 years, he achieved his retirement number.
He started Financial Freedom Countdown to help everyone think differently about their financial challenges and live their best lives. John resides in the San Francisco Bay Area enjoying nature trails and weight training.
Here are his recommended tools
M1 Finance: John compared M1 Finance against Vanguard, Schwab, Fidelity, Wealthfront and Betterment to find the perfect investment platform. He uses it due to zero fees, very low minimums, automated investment with automatic rebalancing. The pre-built asset allocations and fractional shares helps one get started right away.
Personal Capital: This is a free tool John uses to track his net worth on a regular basis and as a retirement planner. It also alerts him wrt hidden fees and has a budget tracker included.
Credit Karma partners with Equifax and TransUnion and offers free credit reports and free credit scores updated weekly. It also provides alerts when it detects unusual activity on your credit files. Monitoring your credit report for errors can save you thousands.
Streitwise is available for accredited and non-accredited investors. They have one of the lowest fees and high “skin in the game,” with over $5M of capital invested by founders in the deals. It is also open to foreign/non-USA investor. Minimum investment is $5,000.
Platforms like Yieldstreet provide investment options in art, structured notes, supply chain financing, etc. They also have fixed-income portfolios spread across multiple asset classes with a single investment with low minimums of $2,500.