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.

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 great, as this would result in less liquidity or more illiquidity for 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 if you 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.

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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