What Is Liquid Net Worth?
Liquid net worth is a measure of your financial assets minus your liabilities. It indicates how much you could access in cash quickly without having to sell any of your investments or other properties. Liquidity can be important for many reasons, such as being able to pay off debts and making purchases that require quick cash flow.
Why Does It Matter?
Liquid net worth is a vital part of planning for your financial future. Liquidity can be essential if you ever need to make large and unexpected purchases, such as purchasing a home or paying medical bills. Having too many assets in an illiquid form that cannot easily be converted into cash means that should an emergency arise where money is needed quickly, there could be great difficulty in accessing it. Liquid net worth is an essential measure of your financial health. It can be used by investors, business owners, or even individuals who want to make large purchases without selling their assets or taking out loans.
The Formula for Liquid Net Worth
Calculating the liquid net worth for yourself is not difficult. Liquid net worth is simply the sum of all your assets minus all of your liabilities. For instance, if you have $50,000 in cash and investments (i.e., stocks or bonds), $75,000 in brokerage accounts, and $100,000 in a 401(k) account. If these are your liquid assets, the total sum of your liquid assets is $225,000. If you owe $20,000 on credit card debt and $25,000 in student loans, the total sum of your liabilities is $45,000. Subtract $45,000 from $225,000, and your liquid net worth is $180,000.The Benefits of Having A High Liquid Net Worth Having a high liquid net worth is beneficial for many reasons.
- It provides you with the ability to make large purchases without taking out loans or selling your assets.
- If an emergency should arise and cash quickly needs to be accessed, this can easily be done by tapping into your available cash reserves. Liquidating some of your assets can be done without a significant impact on the total value of those assets.
- Liquid net worth also provides you with more flexibility, which helps you plan future purchases or make other financial decisions.
Ways To Increase Your Liquidity
There are several ways to increase your liquid net worth. These include:
- Saving money and investing it in assets that can be easily converted into cash when needed, such as stocks or bonds. Liquidating some of these investments requires little effort but will provide you with quick access to much-needed capital.
- Eliminating debt. Debt is an expense that comes with interest payments, which reduces your liquid net worth in the form of regular monthly loan repayments. Eliminating or paying off debt will increase your liquidity and improve your financial health.
- Make sure you have adequate insurance coverage to cover any potential emergencies should they arise. Liquid net worth is only beneficial if it can be accessed in times of need, which means insurance coverage should be considered one of your top priorities.
Liquid net worth is a useful way to determine how much cash you have access to quickly. It’s essential for planning your future and being financially secure, which can be achieved by saving money, investing it in easily liquidated assets, becoming debt-free where possible, and having essential insurance coverage. Liquidating your investments requires relatively little effort but will provide you with quick access to much-needed capital when needed. Having a high liquid net worth can be beneficial in many ways. It provides you with the ability to make large purchases without taking out loans or selling your assets. Liquid net worth also comes with benefits such as increased flexibility and better planning for future purchases, which are critical when making major financial decisions.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.