You might be familiar with net worth or a person’s total value of assets, but are you also aware of liquid net worth? It is a more important measure to evaluate your financial health. Liquid net worth is key to determining one’s financial security and achieving financial freedom.
What Is Liquid Net Worth?
Liquid Net Worth is the value of your net worth if it was all liquidated or immediately sold and converted to cash. It can be important because not every type of asset is equal or equally accessible.
Liquid assets will be extremely valuable in case of an emergency situation where you need cash quickly. In contrast, your Net Worth is calculated by simply adding up your assets and subtracting your liabilities.
Why Does It Matter?
Calculating and keeping track of your liquid net worth can prove to be beneficial. It motivates you to create an emergency fund that is both easily and quickly accessible. If you know your liquid net worth, you can liquidate any assets necessary to pay for a major emergency or expense that your savings cannot pay for.
What Factors Affect One’s Liquid Net Worth?
Based on their holdings, the factors affecting liquid net worth will be different for everyone. For instance, if most of your assets are in cash and cash equivalents, your liquid net worth will be higher than someone who has the majority of their assets in retirement savings or real estate.
Here are some factors that are unique to each asset class:
True Liquid Assets
These assets include cash and cash equivalents that include cash on hand, checking and savings accounts, money market accounts, and certificate of deposits (CDs). They will not be reduced upon liquidation since these assets have generally no fees and market value considerations.
The most complicated liquid asset of all is probably real estate. It takes time to sell a house, even in a strong housing market. Not only weeks, but it can also take several months in a slow market.
Exactly how much you can sell it for will depend upon how quickly you want to sell. If you need to sell the house quickly, you might have to drop the price below the prevailing market value. If you want to get the full market value, you must be prepared to wait as long as it takes to sell.
It can be tricky to include business equity in your net worth as it may be difficult to value a business exactly. Aside from coming up with a reasonable number, you also have to make a reasonable guess on the saleability of the business.
For most people, they just guess the market value of their businesses. But you will need an industry expert to have your business appraised periodically if you want a more accurate number. If you are self-employed, it is best to exclude business equity from liquid net worth.
Many people overvalue their personal possessions by assigning valuations based on retail cost. But the retail value would be completely irrelevant if you have to convert them to cash. What they could be sold for will depend on securing a willing buyer.
As a general rule, one’s personal possessions should not be worth more than 10% to 20% of their retail value. There are exceptions for objects with established markets such as artwork or jewelry items.
Calculating Your Liquid Net Worth
The formula for calculating your liquid net worth is as simple as this:
Liquid Net Worth = Liquid Assets – Liabilities
Assets are anything you own that has value. These usually include cash, investments (stocks, bonds, certificates of deposits), homes, vehicles, retirement accounts, and valuable antiques, artworks, jewelry.
Liabilities are debts. They may consist of credit card balances, outstanding mortgage balance, student loans, and any other loans like payday loans.
For example, if the total value of your assets is $700,000 and your liabilities are $300,000. Your total net worth is $400,000.
Increasing Your Liquid Net Worth
1. Cut Your Expenses
Keep track of your expenses and find areas where you can cut back. Many people spend more than they need to. This can include day-to-day expenses such as food, transportation, gas, or streaming service subscriptions, etc.
By cutting your expenses from small to big things, it will add up very quickly. Even a couple of dollars you save can and will make a difference.
2. Review Your Annual Costs
Look at your insurance and healthcare premiums every year and compare their interest rates. See if you can trim or completely eliminate any of your annual costs. The rest should go to your savings or you can invest them.
3. Review & Erase Liabilities
Your liabilities are an easy number to calculate. Once you find what they are and how much they add up to, you can reduce or eliminate them. A huge factor in increasing your net worth is getting rid of debt.
You can also consider making more payments towards your debt. Try to pay every week, rather than paying monthly. This will help reduce the amount of interest you will have to pay and reduce the principal at a quicker rate.
4. Have Multiple Streams Of Income
Secure a flow of income aside from your primary source (9-5 job). It will add security in the case that you lose that source of income. Examples of secondary income can be starting a blog, teaching English or other subjects, selling crafts online, freelance writing, etc. You can start with just a little bit of time and effort.
Additionally, you can try working on your passion or hobby and find ways to make money off that. That way, you can earn money while doing what you enjoy. For instance, if you love to write stories, you can try to earn income by writing and selling a book or creating an online writing course.
5. Invest In The Stock Market
Aside from saving, start investing your money in the stock market to gain higher returns. It may seem overwhelming at first, but once you have learned more about investing, you will find yourself growing more and more confident.
Try reading books about investing if you want to do it yourself. Or if you are only beginning, investing with the help of Robo-advisors may be best for you. This wealth management platform effectively manages your stocks and bonds. It is based on the amount of risk you are comfortable with.
Your liquid net worth allows you to evaluate your financial security. Knowing how much money or assets you have access to helps you feel secure and prepared in the event of emergencies. It provides flexibility in your finances and serves as your key to financial freedom.