WHAT IS LIQUID NET WORTH: Definition & How to Calculate Liquid Net Worth

What Is Liquid Net Worth
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It may be useful to compare the value of your assets against the value of your liabilities when you evaluate your short- and long-term financial goals. That’s where net worth comes in; it can help you figure out whether you should cut your monthly expenditure, open a retirement savings account, or change your tax withholdings. Total net worth and liquid net worth are the two most common types of net worth. We define liquid net worth and explain to you how to calculate it using its calculator in this guide; including differentiating between liquid net worth vs total net worth.

What Is Liquid Net Worth?

After deducting your liabilities from your liquid assets, your liquid net worth is the amount of money you have in cash or cash equivalents. It’s quite similar to net worth, with the exception that it excludes non-liquid assets like real estate and retirement funds.

Liquid and non-liquid assets, on the other hand, have an impact on your total net worth. This involves adding up the worth of all your assets, including vehicles, real estate, retirement accounts, securities, cash, and everything else with a monetary value. The value of your liabilities will then be out from this total. You’ll have a negative net worth if your liabilities surpass your assets. If your assets are worth more than your liabilities, you’ll have a positive net worth. Student loans, vehicle loans, credit card bills, taxes, and mortgages are just a few examples.

Overview

Cash on hand or an asset that can be easily converted to cash is a liquid asset. Cash reigns supreme in terms of liquidity, as cash as legal tender is the ultimate goal. Assets that can be converted to cash in a short period of time are similar to cash in that the asset owner can obtain cash quickly and readily in a transaction exchange.

Because the owner is sure that the assets may be quickly traded for cash at any moment, liquid assets are frequently seen as cash and may be referred to as cash equivalents.

For a liquid asset to be termed liquid, numerous elements must be present. It needs to be in a well-established, liquid market with a significant number of willing customers. The transfer of ownership must also be safe and simple. The time it takes to convert money varies in different circumstances.

Cash and securities that may be exchanged for cash immediately are the most liquid assets. Assets having a cash conversion forecast of one year or fewer might also be considered liquid by companies. These assets are the company’s current assets when taken together. Accounts receivable and inventories are now in the definition of liquid assets.

Liquid assets are critical for both individuals and corporations since they are the initial source of cash when it comes to paying payment obligations.

How to Calculate Liquid Net Worth

You’ll need to calculate your liquid net worth to figure out how much money you have. Short-term investments and stocks are examples of liquid assets, although money in a savings account can also be considered liquid because it can be withdrawn from an ATM as needed.

To calculate your liquid net worth, first, figure out how much you owe in obligations, then deduct that amount from your total liquid assets using a calculator. If some of your liquid assets are subject to a liquidity discount, you’ll need to factor it into your calculations.

Consider the following scenario: You have $50,000 in cash on hand and $200,000 in mutual funds. Your 401(k) account, on the other hand, is worth $100,000. If these were your sole liquid assets, you’d have $350,000 in total. If you owe $30,000 on a loan, you owe $30,000 and have $30,000 in liabilities. Subtract that amount from the total quantity of liquid assets. If you deduct $30,000 from $350,000, you’ll end up with $320,000. This is the amount of money you have in liquid assets.

How to Grow Your Liquid Net Worth

You may be pleased with your net worth when you see it, but that happiness is quickly shattered when you factor in your liabilities and calculate your liquid net worth. You want to have as much money as you need for a comfortable existence. But it appears that your liabilities will prevent you from doing so.

Even if your liquid net worth isn’t where you’d like it to be, you can try to change that. Here are some strategies for increasing your liquid net worth over time.

#1. Consider More Savings

You should consider emergency savings if you haven’t already. Emergency savings accounts are beneficial because they guarantee that you will have money when you need it most during a crisis. You might not know where to begin saving, especially if you’re currently struggling to make ends meet.

You don’t have to start saving a lot of money right away. Also, you can begin with as little as $10 and gradually increase your savings over time. Even if you continue to save $10 that you would have spent on a pizza. You will see a difference over time and will not regret saving some money. If you’re having trouble budgeting, you can download an app that can assist you in creating a solid budget and preventing you from overspending on items you don’t require. You can also set up a separate savings account to avoid being to squander your money.

#2. Cut Debt

Of course, if you have too much debt, increasing your liquid net worth is impossible. You should start trimming it if you’re already in that scenario. Some debts can be worked out. A credit card is an excellent example. For example, you could agree to make more monthly payments, which would reduce your debt.

If this doesn’t work, debt consolidation may be an excellent alternative because it allows you to make one payment rather than several. It will be less difficult to stay on top of your debt and pay it off.

#3. Earn More Money

If your current income is insufficient, you may want to explore having a secondary source of income. Get a part-time job or sell something to supplement your income. If you can increase your income, you will be able to increase your liquid net worth, making life easier for you.

Of course, you should save money on your costs and taxes as well. So don’t simply think about going out and having a good time.

#4. Paying off Debt or Saving

Is it better to save money or pay off debt? This could be a major problem for you. This, of course, is entirely dependent on you and your financial situation. Why not consider both at the same time? It is possible to save money while paying off debt. It’s also a good idea to avoid using a credit card for this. Instead of repaying your debt, you should save.

Your monthly payments should ideally be high enough to cover not just the amount you need each month, but also the interest. If you don’t do this, you’ll be stuck in debt for a longer period of time.

Do You Include Retirement Accounts in Liquid Net Worth?

Your liquid net worth should comprise all of the assets you have access to in a short amount of time that can be turned into cash. Now, what constitutes “fast and easy” will be perceived differently by different people.

However, unless you are very close to your retirement age, you will not be able to access the funds in your retirement account or plan without incurring a cost or penalty. Otherwise, you may have to pay penalties if you take money out of your retirement account before the time you had planned. Since you can’t immediately convert them into cash at their full market value (or at least not without incurring additional fees), you don’t factor them into your liquid net worth.

How Do You Figure Out Your Liquid Net Worth?

To get your liquid net worth, take your current liabilities and deduct them from your liquid assets. This will give you your liquid net worth. The term “current liabilities” refers to debt payments and other obligations that are due in the near future. Liquid assets comprise anything that may be easily converted to cash, while current liabilities include any additional liabilities (1-12 months).

What Does it Mean if I Have a Negative liquid Net Worth?

The average person has a negative net worth as well as a negative liquid net worth. This is especially important to keep in mind if you are still in the beginning phases of your professional life or if you have a significant amount of outstanding student loan debt. There are a lot of people who do not have sufficient cash or other liquid assets to meet all of their obligations in full. If you want to enhance your assets while decreasing your responsibilities, read this article carefully and follow the measures it outlines.

What Is the Most Liquid Investment?

Cash on hand is by far the most liquid investment option because it is simple to access and you do not need to convert it to another asset before you can utilize it. After that comes things like savings accounts, checking accounts, high-interest savings accounts, bonds, certificates of deposit, and so on.

Is a 401(k) Plan Considered Part of a Person’s Liquid Net Worth?

If you are not yet of retirement age, then your 401(k) account will not, as a rule, be considered part of your liquid net worth. The money that is held in a 401(k), an IRA, or any other type of retirement account is subject to certain regulations on when and how it can be released. In most cases, an early withdrawal will result in a penalty of at least 10%, in addition to any taxes that are owed.

Liquid and Non-Liquid Markets

Liquid and non-liquid markets are dealt with by both individuals and businesses. The ultimate goal for liquidity is cash, and the ease of converting to cash often distinguishes a liquid from a non-liquid market. But there are several other factors to consider.

A liquid asset must have a well-established market with sufficient buyers and sellers for it to be easily converted to cash. The asset’s market price should not be high, as this would result in less liquidity or more illiquidity for the following market players.

Because of the enormous number of buyers and sellers. The stock market is an example of a liquid market, allowing for easy conversion to cash. Publicly traded equities securities are liquid assets. Because they can be sold for full market values on-demand using electronic platforms. However, depending on market capitalization and typical share volume transactions, liquidity can differ for each security.

The foreign exchange market is the world’s most liquid market since it handles trillions of dollars in transactions every day, 24 hours a day. Making it hard for any single person to influence the exchange rate.

Total Net Worth vs Liquid Net Worth

Your overall net worth will be $200,000 if the gross value of your assets is $500,000 and you have $300,000 in all forms of obligations. However, your liquid net worth vs net worth will be lower, remember it has to be with a specific calculator.

Let’s imagine you wanted to sell all of your belongings to pay for significant medical treatment, assist a family member in need, or start a new business. You might not acquire full market value for the assets you’re disposing of because the liquidation would have to happen swiftly.

In that case, you may decide to sell your home for 10% less than its fair market worth in order to get a rapid sale. You may do something similar when selling a second automobile or a vacation property. You’ll also have to deduct transaction charges if you’re selling real estate. If you’re selling financial assets like stocks or bonds, the same rules apply.

The liquidation of any non-cash assets will always include transaction expenses. And how much you may have to discount an item for a speedy sale will be on how quickly you need to sell it.

If you have to discount your $500,000 in total assets by $50,000 before incurring $30,000 in liquidation fees, your total assets will be $420,000. After making use of your calculator your liquid net worth will be $120,000 after removing $300,000 in liabilities.

Although this is $80,000 less than your overall net worth, it represents your true net worth.

For what it’s worth, you can ask for a loan from a bank. They’ll almost certainly accept your overall net worth vs liquid as the actual figure. Liquid net worth, on the other hand, will be the true number if you need to liquidate your assets to raise cash.

Why Is Liquid Net Worth Important?

The number of funds you can access at a moment’s notice is the most essential reason to be concerned about your liquid net worth. Liquid net worth is what you have right now. It’s not the amount of money you’d have if you took drastic measures and liquidated all of your assets; rather, it’s the amount of money you may reasonably anticipate having for a short period of time.

So, if you have an immediate, unforeseen financial need, such as a medical emergency, equipment failure, a lawsuit, or a business opportunity, you’ll turn to your liquid net worth. As a result, the measurement reflects your company’s financial stability and ability to respond to problems and opportunities. Even if there isn’t a pressing need, knowing your liquid net worth can provide you peace of mind regarding your cash flow and help you avoid financial stress.

Is a Pension Considered in Net Worth?

Although they are not typically accounted for when calculating a person’s net worth, pensions do play a significant part in the process of retirement planning. Your predicted income requirements in retirement might be significantly reduced if you include in future income streams such as defined benefit pension plans and social security benefits when you are doing retirement planning.

Do You Count Mortgages in Net Worth?

It is important to keep in mind that in order to calculate your net worth, you must first deduct all of your liabilities, which include your mortgage. If the value of your property is $300,000 and the amount you owe on your mortgage is $200,000, the equity in your home will increase your net worth by a total of $100,000 ($300,000 minus $200,000 equals $100,000 equity).

Conclusion

Liquid assets are essentially cash or cash equivalents that can be converted into money quickly and readily. When assessing your liquid net worth (at this point you will need the assistance of a calculator), remove your obligations from your assets. Calculating your net worth, however, may be useful for comparison and budgeting considerations. You’ll be able to take a more holistic view of your financial condition this way.

FAQs

What qualifies as a liquid asset?

Liquid assets include cash, checking and savings accounts, equities, bonds, mutual funds, and exchange-traded funds (ETFs).

Does liquid net worth include your house?

No, it usually does not. Selling a house takes time, and even in a favorable market, you’ll have to wait at least a month to receive your money.

How much liquid cash should I keep?

Most financial experts recommend having a cash reserve equal to six months’ worth of expenses: If you need $5,000 each month to live, set aside $30,000.

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