How to Calculate Your Liquid Net Worth (and Why You Should)

What Is My Total Net Worth?

If you were to look at the wealthiest individuals on the planet, you’d see that they have net worths of billions of dollars. However, that doesn’t mean that the Bill Gates of the world have billions in a savings account. In fact, most of that money is tied up in fixed assets, like real estate, long-term investments, and corporate holdings. 

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Just because you don’t have a price tag in the eight or nine-digit range doesn’t mean that you can’t have a positive net worth. The most straightforward formula for determining this figure is calculating the value of all of your assets and comparing them to your liabilities (debts). 

To help you wrap your head around this concept, let’s do a practice example. 

First, you want to account for all of your assets, both fixed and liquid. Fixed assets are ones that can’t be turned into cash quickly. 

For example, if your home is worth $400,000, you would have to put it on the market and find a buyer before you could get that money. Also, after taxes and fees, your cut will be somewhat lower. So, for the assets column, you should include everything, such as:

Car – $15,000 Blue Book Value

House – $400,000 based on a recent appraisal

Savings – $50,000

Retirement Accounts – $525,000 in IRAs

Stocks and Bonds – $200,000

Jewelry – $10,000

Total: $1,200,000

If you have any other substantial assets, like collector’s items or other valuables, you can include them as well. Other belongings like clothes and furniture don’t count because their worth is not intrinsic. 

If you really wanted to count all of your “stuff,” you’d have to get it appraised. Even then, they will depreciate in value the more you use them, so your total would have to be adjusted annually. 

Next, you want to look at your liabilities, including any money you owe on those assets. So, if you still have a balance on your car and a mortgage to pay off, you’ll have to count that against your net worth. All liabilities should be included, but you can bundle types of debt (i.e., credit cards). 

Mortgage – $200,000

Car Loan – $5,000

Credit Cards – $5,000

Student Loans – $20,000

Total: $230,000

Based on these numbers, your current net worth would be $970,000 ($1,200,000- $230,000). If you owe more money than you have in assets, then you would have a negative net worth. 

Now that we understand the fundamentals let’s break down the difference between liquid and fixed assets.

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Why Liquid Net Worth is Important

Liquid net worth is an important measure because it helps you gauge how much money you have available to spend, save or invest.

The liquid assets that are used for calculating your liquid net worth should be those of which can be easily converted into cash. These would include stocks and bonds as well as other investments such as certificates of deposit (CDs).

When your liquid net worth is positive, you have the ability to spend more money. When it’s negative, you’ll need to work on saving or investing in order to make up a deficit and return yourself back into the black.

Most people want their liquid net worth to be higher than when they started out each year.

We recommend using liquid net worth as a measurement to help you reach your goals. For more insights into what liquid assets are, how they work, and the best ways to leverage them for success, continue reading this article.

Liquid and Non-Liquid Markets

Both individuals and businesses deal with liquid and non-liquid markets. Cash as supreme is the ultimate goal for liquidity and ease of conversion to cash generally separates the distinction of a liquid vs. non-liquid market but there can also be some other considerations.

A liquid asset must have an established market in which enough buyers and sellers exist so that an asset can easily be converted to cash. The market price of the asset should also not be significantly changed, resulting in less liquidity or greater illiquidity for subsequent market participants.

The stock market is an example of a liquid market because of its large number of buyers and sellers which results in easy conversion to cash. Because stocks can be sold using electronic markets for full market prices on demand, publicly listed equity securities are liquid assets. Liquidity can vary by security, however, based on market capitalization and average share volume transactions.

The foreign exchange market is deemed to be the most liquid market in the world because it hosts the exchange of trillions of dollars each day, 24 hours a day, making it impossible for any one individual to influence the exchange rate. Other liquid markets include commodities and secondary market debt.

Illiquid Markets

Illiquid markets have their own considerations and constraints. These factors can be important for individuals and investors when allocating for liquid vs. non-liquid assets and making investment decisions.

For example, a real estate owner may wish to sell a property to pay off debt obligations. Real estate liquidity can vary depending on the property and market but it is not a liquid market like stocks. As such, the property owner may need to accept a lower price in order to sell the property quickly. A quick sale can have some negative effects on the market liquidity overall and will not always generate the full market value expected.

Another type of controversial illiquid asset may include private market fixed income which can be liquidated or traded but less actively. Overall, in considering illiquid assets, investors usually apply some type of liquidity premium which requires a higher yield and return for the risk of liquidity.

What if I have a negative net worth?

So, what happens if your total net worth is negative? You could have more debt than assets which would result in your net worth being negative.

For instance, student loans, credit card debt, etc. could result in you owing more than you actually have in cash and assets. However, you are able to improve your total net worth and increase your liquid net worth by taking the initiative with the following steps!

How to improve your liquid net worth

There are many steps that you can take to improve your liquid net worth. A good goal is to increase your liquid net worth until it totals 3 to 6 months of your expenses. This way, you could use your liquid assets to cover your living expenses, if needed.

You may find a strategy that works best for the specific financial areas you are looking to improve, one that works best for your lifestyle and is aligned with your short and long-term goals. Let’s highlight a few steps you can take to improve your liquid net worth over time.

Step 1: Pay off your debt

Because interest on debt is usually greater than interest on assets, reducing your debt is a great first step in increasing your net worth.

Step 2: Create a savings account and emergency fund

While a savings account and emergency fund can go hand in hand, you may use these types of funds for two different things. A savings account may be used for larger purchases or certain goals, while an emergency fund may be funds that you don’t touch unless an issue arises. Paying yourself first, before allocating your funds to your bills, can go a long way. Setting money aside for future plans, emergencies, and other unexpected expenses can save you time and money when things come up, but can also add to your liquid net worth.

Step 3: Minimize your expenses

This is where things can get sticky. A healthy work-life balance is important, and we all can get overwhelmed by our responsibilities and paying bills. However, when organizing your expenses, you may find that you are spending more in certain areas than you were aware of (daily coffee or eating out, for example). Awareness of these things can give you the perspective to tweak your budget, potentially freeing up money to add to your savings or investment portfolio.

Step 4: Build your investment portfolio

Whether you are just getting started with investing in the stock market, interested in purchasing more real estate, or simply learning how much you need for retirement, expanding your investment portfolio sometimes can contribute to creating multiple streams of income. Although investing comes with many risks, riding the highs and lows of the market for the long term can have an impact on your return over time, which ultimately has the power to enhance your liquid net worth.

Liquid Net Worth FAQ

#1: Do You Include Retirement Accounts in Liquid Net Worth?

When measuring your liquid net worth, you want to include the kind of assets that can easily and quickly be converted into cash. Now, the definition of quick and easy varies for every individual.

In general, though, retirement accounts and plans are not considered liquid unless you’re close to your retirement years and can gain access to the funds without any fees or penalties. In any other case, if you withdraw your retirement funds earlier than expected, you’ll most likely be subject to early withdrawal fees. So, for that reason, they typically are not included in your liquid net worth calculations because you cannot quickly exchange them for cash for their full market value – at least not without any additional charges.

#2: What Is the Most Liquid Investment?

Cash in hand is by far the most liquid investment, as it is easily accessible and you don’t have to sell cash to use it. Then come checking accounts, high-interest rate savings accounts, certificates of deposits, bonds, and so on.

How to Calculate Liquid Net Worth?

To find out your liquid net worth, you will have to calculate it. Liquid assets are either short-term investments or stocks, but they could also be the money in a savings account since you can simply withdraw it from an ATM when necessary.

To determine your liquid net worth, you have to make sure you find out how much you have in liabilities and then subtract that amount from the whole liquid asset sum. If a liquidity discount applies for some of your liquid assets, then you will have to take this into account when making the calculation.

Let’s imagine the following scenario. You have $50,000 in cash and $200,000 in your brokerage accounts. At the same time, your 401(k) account has $100,000. In total, you would have $350,000 if these represent your only liquid assets. Then, if you have to pay $30,000 in loan debt, you have $30,000 in liabilities. Take that amount out of the sum representing the total liquid assets. In this case, if you take $30,000 out of $350,000, you would have $320,000. This represents your liquid net worth.

Liquid Assets Identified and Analyzed

Liquid assets represent any cash or assets that can be readily converted to cash. Examples of liquid assets include cash, money market accounts, checking accounts and savings accounts. Though there is some debate about this some people also regard as liquid accounts receivable, stocks, mutual funds, bonds and any other securities that can be quickly turned into cash.

There are two key metrics for gauging liquid assets, both of which are common for businesses to use but have applicability for individuals. One is the quick ratio. It measures how well a company can meet its short-term liabilities (such as debts payment, payroll, inventory costs, etc.) with its cash on hand. In this case “cash” is defined as either actual cash or cash-like assets which can quickly be converted. Cash-like assets are traditionally defined as liquid properties that the company can easily sell off, such as stocks, or near-term revenue, such as accounts due for collection. These are the company’s “quick” assets, giving the quick ratio its name. The quick ratio, then, is defined as the ratio of all liabilities due within the next year measured against all liquid assets or revenue due within the next year.

Another is the current ratio. It compares a company’s current assets to the debts that it will have to pay within the year. It is simply calculated by dividing a company’s total assets (cash and easily convertible assets) by its short-term debts (accounts payable for the year). Once you’ve calculated the current ratio, you can draw inferences about the company.

How do you calculate liquid net worth? 

Before you can calculate your net worth, it’s smart to compile a list of your assets and liabilities.

So, how do you go about determining the total value of your assets? It's going to take a bit of research: 

  • For things like your checking and savings accounts, you can log in to your online account and regard your current balances

  • For assets like your home or car, you may need to get an appraisal for the current market value or look at resources like Kelley Blue Book

Once you compile your list of assets and make note of which ones are liquid, you’ll then compile a list of your liabilities and the amount of money you owe. You can use statements from your lenders to determine your loan and credit card balances. 

Once you know both your assets and liabilities, you can determine your liquid net worth. 

There are two ways to calculate your liquid net worth: 

  1. Liquid Net Worth = Total Liquid Assets – Total Liabilities

  2. Liquid Net Worth = Total Assets – Total Non-Liquid Assets – Total Liabilities

Of the two equations listed above, the first equation is likely easier to use. It doesn’t require you to list all of your assets. Instead, it only requires you to determine the value of the liquid ones. 

Both equations should still yield the same figure for your liquid net worth, but the second one requires you to list out all of your assets and then subtract the non-liquid ones, like your car and home. 

Let’s say you have the following liquid assets: 

  • Cash: $500

  • Checking account: $2,500

  • High-yield savings account: $10,000

  • Money market account: $2,000

If you add these together, your total liquid assets are $15,000. 

Now, let’s say that you have the following liabilities: 

  • Outstanding car loan: $4,000

  • Outstanding credit card debt: $8,000

The sum of your liabilities is $12,000. 

If you subtract your liabilities from your liquid assets, you’ll see that your liquid net worth is $3,000, which is a positive net worth.

Total Net Worth vs. Liquid Net Worth

When calculating liquid net worth, you subtract total liabilities from your total liquid assets. On the other hand, total net worth is the gross value of your assets minus total liabilities.

Liquid net worth considers the amount of money you have at hand: cash, cash equivalents, and other liquid assets less liabilities. Liquid assets are assets that you can quickly turn into money without a significant loss 一 this includes stocks, bonds, mutual funds, checking accounts, certificates of deposit, money market accounts and more.

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Total net worth factors in the value of your liquid assets and non-liquid assets minus liabilities. Non-liquid assets, also known as illiquid assets, are assets that take time to convert into cash, such as real estate, vehicles, private equity and even retirement accounts.

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