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What is Your Liquid Net Worth?
Everyone talks about net worth, but very few people bring up liquid net worth. Calculating liquid net worth is important, especially if you are the owner of a big business and you want to keep it running. You need to know how much money you have left after deducting your liabilities from the liquid assets. In this article, you will learn more about liquid net worth, as well as how to calculate and grow it.
What Is My Total Net Worth?
People like to discuss how much money celebrities make. They always talk about net worth and how big company owners or investors have billions of dollars, and how they could help so many poor people with that money. However, what they fail to understand is that this is not money they could simply take and spend however they wish. Let’s take Bill Gates, for instance. Just because he has a great net worth, it doesn’t mean he actually owns billions in savings accounts. Actually, there are fixed assets, such as long-term investments or real estate, that the money is tied up in.
So, you may be wondering what your total net worth is. In order to see that number, you need to find out how much value all your assets have and then make a comparison to all the liabilities, which are usually debts.
When counting your assets, you have to consider both liquid and fixed assets. Things you can include in your calculation are your house, car, jewelry, stocks and bonds, retirement accounts, and savings. After finding out how much you own in assets, you should take a look at the liabilities, as well as the money you owe on those assets. Some liabilities you may have are student loans, credit cards, car loans, and mortgages.
What Are Liquid Assets?
Liquid assets refer to any asset that you can easily and quickly turn into cash, or to the cash that you have. Basically, cash is a good example of a liquid asset. Other examples include checking accounts, amounts receivable, stocks, savings accounts, money market accounts, bonds, mutual bonds, and anything of the sort. The most important aspect is the possibility of having them readily converted into cash.
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.
How to Grow Your Liquid Net Worth
You may be happy seeing how much net worth you have, but this happiness is instantly ruined when you take your liabilities into account and find out your liquid net worth. You want to have as much money as necessary for a good life, and it feels like the liabilities will not allow that.
Well, even if your liquid net worth is not where you want it to be, you can work to improve this situation. Here are some things you can do in order to improve your liquid net worth over time.
Consider More Savings
If you didn’t consider emergency savings just yet, you should. Emergency savings funds are very useful because it ensures you will have money when you need it the most during a crisis. You may not know how to start saving, especially if you already find it hard to handle your earnings.
Well, you don’t have to start saving massive amounts. You can start with as little as $10, and slowly save more over time. Even if you keep saving $10 that you otherwise wanted to spend on a pizza, you will still see a difference after years and you will not regret saving some money. If you have problems with budgeting, you can download an app that will help you make a good budget and stop you from spending money on things you don’t need.
You can also create a unique savings account so that you won’t be tempted to spend your money.
Of course, boosting your liquid net worth would not be possible if you have too much debt. If you’re already in that situation, you should start trimming it. Some debts can be negotiated. A credit card is a good example of that. For instance, you can agree to make higher monthly payments, meaning that the debt would be reduced.
If this doesn’t work for you, debt consolidation is also a good option, because it allows you to make a single payment instead of several ones. It will be easier to keep up with your debt and pay it off.
Earn More Money
If you don’t earn enough money, you can also consider having an alternative income source. Take a side job or sell something. If you manage to earn more cash, you will be able to grow your liquid net worth, which will make life easier for you.
Of course, you should still save money for your expenses and taxes, so you shouldn’t think just about going out and having fun.
Paying off Debt or Saving
Should you save money or pay off your debt? This may be a big dilemma for you. Well, this all depends on you and your financial situation. It is possible to save money while paying off your debt, so why not consider both at the same time? You should also make sure you do this without taking a credit card. Save over debt repayment instead.
Ideally, your monthly payments should be high enough to pay not only the amount you require every month but also the interest. If you don’t do this, you will have to deal with debt for a longer time.
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The Bottom Line
Liquid net worth is different from net worth – it shows you how much liquid money you have. It is often confused with the total net worth, which is a mistake, because liquid net worth actually subtracts your liabilities, specifically your debts. When calculating your liquid net worth, make sure you use the right formula to see how much you have in assets and how much you have in liabilities. This way, you will find out the amount of cash you owe and you can start growing your liquid net worth.