People like to talk about the huge net worths of business people, professional athletes, and other celebrities who we see in the media.
For example, we might talk about Elon Musk or Mark Zuckerberg and say their net worth is $50 billion, $75 billion, or $100 billion.
Does this mean they can go out and buy houses and cars worth billions of dollars?
No, they can’t.
This is because their net worth is not the same as how much cash they have.
This begs the question, “What is liquid net worth, then?”
We’ll also need to discuss the difference between liquid net worth and net worth.
We’ll also talk about why it’s more important to know your liquid net worth than just your total net worth.
Net Worth vs. Net Worth in Cash
Before we go any further, let’s talk about the difference.
Liquid Net Worth
If you had to pay off your liabilities with your liquid assets, that’s your liquid net worth.
Liquid assets consist of cash and other things easily convertible into cash.
Cash will, of course, always just be cash. But stocks and bonds would also be a part of it.
It’s the same as asking, “If you needed to make a big payment in 3 days but had no cash in your bank account, what could you sell or turn into cash?”
Should you include personal content in your liquid assets?
Maybe, but not for what they sell for.
If you have jewelry worth $5,000 that you need to sell right away, you will have to sell it for less.
If you want to count these things as part of your liquid assets, you would need to use a discounted rate that you could quickly sell.
So, the three most important things to count in your liquid net worth are:
Remember that you would have to pay taxes and penalties if you took cash out of your 401K or IRA.
The Internal Revenue Service has regulations regarding your use of these programs,
However, the Roth IRA is one of the few exceptions to certain regulations.
There are no penalties for withdrawing this money at any time once the tax has been paid on it.
You can learn more about the rules for other withdrawals here on Investopedia if you need to.
Liquid Net Worth Example:
Say you have a house worth $100,000, $10,000 in cash, and $15,000 in stocks.
If you owe $5,000, you have $20,000 in cash and other liquid assets.
$10,000 in cash plus $15,000 in stocks equals $25,000.
Liabilities = $5,000
What is Liquid Net Worth?
Liquid Assets – Liabilities = Liquid Net Worth
$25,000 – $5,000 = $20,000.
This number is just your assets minus your debts.
This time, you list other things you own, like homes, businesses, rental property, and cars.
Let’s keep things simple, so it’s easy to determine the difference between liquid net worth and net worth.
So let’s take our same previous example.
Let’s say you have a house worth $100,000, $10,000 in cash, and $15,000 in stocks.
If you owe $5,000, your total wealth is $120,000.
House worth $100,000, $10,000 in cash, and $15,000 in stocks adds up to $125,000.
Liabilities = $5,000
What your net worth is: Total assets minus total debts equal net worth.
$125,000 – $5,000 = $120,000.
Importance of Liquid Net Worth
Your liquid net worth shows how financially stable you are right now.
Understanding the difference between liquid net worth and net worth is crucial to prepare for financial emergencies.
If you lose your job or get sick, you can use your liquid net worth as an emergency fund.
Your total net worth is more important for your long-term goals and financial stability.
But it’s important to know and remember both.
How To Increase Your Liquid Net Worth
There are a few ways to increase your liquid net worth.
Here are some strategies for increasing your liquid net worth.
Lower Your Expenses
Getting your costs down may sound easy, but it can take a lot of work if you’re already running a tight ship.
Your expenses are your debts, so if you can find ways to cut them, you can increase your net worth (what a business would call net income).
Credit card debt is an excellent place to start.
You probably have to pay a high-interest rate if you have a balance.
Working to pay off these balances will save you at least the interest you pay every month.
Now is a great time to sit down and make a budget if you don’t already have one.
If it seems overwhelming, just get started.
Even just beginning to get an idea of what you’re spending in different categories is better than nothing at all.
Increase Your Investments
The rewards from investing may take some time to materialize, but they may be worth the wait. It will also help your total net worth.
Investments are never guaranteed, so do as much research as possible before putting money into something.
If you want to get into the stock market quickly, companies like Robinhood and Webull are great places to start.
It is strongly suggested you buy an index fund.
One that tracks the entire S&P 500, which in turn tracks the whole U.S. economy.
Boost Your Income
Businesses are looking for ways to make more money so that you can do the same.
You can do one or all of three things: get a job that pays more, ask for a raise, or start a side business.
Final Thoughts About Liquid Net Worth
You might have wondered what liquid net worth means and how it differs from net worth.
Your liquid net worth represents your financial health right now, while your net worth represents your financial health in general.
Hopefully, this has shed a little light on these topics.