Liquid Net Worth: Meaning, Calculation & Example

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Liquid net worth is what you have in cash and cash equivalents after you subtract your liabilities from your liquid assets.  

Many people are familiar with the personal finance phrase net worth because it’s a pretty straightforward calculation. You take your total assets minus your total liabilities to figure your net worth.  

Knowing your total net worth is beneficial because it allows you to keep track of where you are on the path to financial freedom or independence. However, strictly using your net worth to determine your financial position can be dangerous when it comes to emergency preparedness.

It would help to understand your liquid net worth when calculating your overall net worth. Your liquid assets are the assets that will come to your rescue if you ever find yourself in a precarious financial situation.  

Here are the most common questions about liquid net worth answered.

What Does Liquid Net Worth Mean?

Liquid net worth is the amount you have leftover in cash or cash equivalents after subtracting all of your liabilities.  

The meaning of liquid net worth is different from net worth in that net worth includes all of your assets, including those that can’t be quickly converted into cash.  

What are Liabilities?

Your liabilities are any money you owe to someone else. Your liabilities are your debts.

Examples of liabilities are:

  • Home Mortgage
  • Credit Card Debt
  • Student Loans
  • Personal Loans
  • Car Loans
  • Income Tax Debt
  • Medical Bills

What Assets are Considered Liquid Assets?

The meaning of the word liquid when it’s not related to finance is “a substance that flows freely but is of constant volume.” Therefore, liquid assets are your assets that can quickly and easily be sold or cashed out without losing value. Here are examples of liquid assets.

Cash 

Cash is a liquid asset in the form of coins or banknotes. Cash is in its most liquid form.

Checking and Savings Accounts 

Your money is a liquid asset in checking and savings accounts because you can quickly and easily withdraw your cash. Also, your money does not lose value if you need to access it immediately.

Money Market Saving Accounts

Money market savings accounts are also considered liquid assets. Money market accounts are a type of savings account but with extra features. Usually, the bank issues a debit card for a money market account, and the account comes with the ability to write checks.

Money market savings accounts typically have higher interest rates than regular savings accounts. However, there is usually a limit of 6 transactions per month, and many money market accounts have balance minimums.  

Cash Equivalents

Cash equivalents are liquid, short-term investments (less than 90-day maturity periods) that are very low risk. Examples include bank certificates of deposit (CDs) with a 3-month maturity or a no-penality clause, short-term government bonds, and money market funds.  

Stocks and Bonds (Outside of Retirement Accounts)

Investments in mutual funds are liquid assets only if they are outside of a retirement account. However, these investments are less liquid than money in a savings account. But, they can be quickly sold for cash if needed.  

What are Assets that are Not Considered Liquid Assets?

When calculating your liquid net worth, it’s essential to know which assets not to include. For example, illiquid assets are assets that you can’t quickly convert into cash. Therefore, you shouldn’t include these assets in your liquid net worth total.  

Real Estate

Real estate is not considered a liquid asset because it can take a long time to sell a house. You can’t convert your equity into cash quickly and easily, and there are fees associated with selling a home. 

Can you sell it fast by lowering the price if you need to? Sure, you can sell it at a discount to unload it quickly. But by lowering the cost, you are reducing the profit you could have otherwise had by waiting to sell it at its fair market value.  

If you own investment properties, they also aren’t considered liquid assets. Selling real estate can take a long time, and market value can vary, so you may not get what you believe your property is worth.  

Cars

Cars also should not be included when calculating your liquid net worth. Can you sell it quickly to turn it into cash in an emergency? Possibly. But as with real estate, there are fees involved with selling a car, and you may have to sell it at a significant discount.  

Retirement Plans

The money you have in a retirement account is not considered a liquid asset unless you are of retirement age. If you aren’t old enough to access your retirement plans without incurring a penalty, any money held in a designated retirement account is not a liquid asset. So your 401K is not counted as part of your liquid net worth when you are under 59 and a half.

Personal Possessions

Personal possessions like jewelry, art, or antiques should not be considered a liquid asset when determining your liquid net worth. The reason is that these items can take a significant amount of time to find a buyer, which would prevent them from being converted into cash quickly. In addition, personal possessions can be challenging to place a monetary value on, and they could sell for much less than market value if you need to unload them right away.  

Can I Use Non-Liquid Assets When Determining Liquid Net Worth?

It would be best not to use illiquid assets when determining your liquid worth. Doing so will superficially inflate your perceived liquid net worth. In addition, believing you have a higher liquid net worth than you do could cause you to be unprepared financially in an emergency.  

That being said, if you want to include your non-liquid assets in your liquid net worth, it’s best to discount the assets for a more realistic liquid value. By discounting the assets before factoring them into your liquid net worth, you can account for fees, transaction costs, or getting less than fair market value for the asset upon liquidation.  

For example, if you want to sell your house to convert your equity to cash, there will be selling fees. Also, if you need money fast and you drop the price for a quick sale, this would cut into profits, thus leaving you with less cash on hand.

How Do I Calculate My Liquid Net Worth?

To calculate your liquid net worth, add up the value of all of your liquid assets and subtract your liabilities from your liquid assets.  

Total Liquid Assets – Total Liabilities = Liquid Net Worth

Example of a Liquid Net Worth vs. Net Worth Calculation

Joe is 45 years old. Here are all of his assets:

Liquid Net Worth Example: Assets

His total assets are: $490,000

Here are his liabilities:

Liquid Net Worth Example: Liabilities

His total liabilities are: $121,000

So his total net worth would be $369,000 ($490,000 – $121,000).

At first glance, Joe’s net worth looks great. However, let’s calculate his liquid net worth now.  

Here’s a look at his assets again. The liquid assets are starred.

Liquid Net Worth Example: Assets with Liquid Assets Starred

Here is his liquid net worth: $25,000 – $121,000 = -$96,000

Joe would have a negative liquid net worth because his liabilities are far greater than his total liquid assets. Not having enough liquid assets could pose a problem if Joe ever needed a significant amount of money for an emergency or if he lost his income.

What Should My Liquid Net Worth Be?

Joe has $25,000 in liquid assets. Some may argue this is enough in liquid assets to serve as Joe’s emergency fund. However, this would depend on his monthly expenses. Most financial advisors recommend having enough money set aside to cover 3-6 months of living expenses.  

If Joe’s expenses totalled around $4,000 a month, $25,000 would be enough to cover his living expenses for 6 months (6 x $4,000 = $24,000). However, if his living expenses were $5,000 a month, he would not have enough liquid assets to cover his six-month expenses.  

The amount of liquid net worth you should have is a personal decision. No one can answer that but you. Sure, people can make recommendations. But you are the one that needs to determine that number.  

Funneling your money into an illiquid asset, such as a 401K, is essential for securing your future and growing your total net worth. However, your liquid net worth is an important indicator of your current financial health.  

You can determine your minimum liquid net worth by deciding on the amount you need in your emergency fund. Think about the amount of money you need readily available that will allow you to sleep at night and not worry about money. For example, if you need $20,000 to cover four months of expenses, you should strive to have at least that amount in liquid net worth.  

Your emergency fund should be kept in a safe, easily accessible place, like a high yield savings account.  

My favorite online high-yield savings account is Axos Bank. There are no maintenance fees, no balance requirements, and a low minimum deposit of $250.  

You can check out Axos bank here.  

What is a Good Amount of Liquid Assets?

A good amount of liquid assets is whatever amount you need to sleep at night and not worry about money. Your emergency fund will be part of your liquid assets, so a good first step is determining the amount of money you need for that.

Take your monthly expenses and multiply that by the number of months you want to be able to cover in the event of an emergency. Your emergency fund should be the minimum amount of liquid assets to have.  

What is Your Liquid Net Worth by Age?

According to CNBC.com, the median liquid net worth for a 35 to 44-year-old is $91,300. For a 45 to 54-year-old, it’s $168,600. And for a 55-64-year-old, the median liquid net worth is $212,500. The average liquid net worth is much higher at $436,200, $833,200, and $1,175,900 respectively.  

The average liquid net worth is much higher because those numbers become skewed by people with extremely high net worth. So use the median numbers when comparing your liquid net worth because those numbers are more common and realistic for most people.  

How to Increase Your Liquid Net Worth Fast

If you find you don’t have enough liquid assets to support a 3-6 month emergency fund, you may want to increase your liquid net worth. Here are some tips for improving your liquid net worth quickly.

Pay Down Your Debt (Liabilities)

If you are carrying debt, the quickest way to increase your liquid net worth is to decrease your liabilities. However, many people find it easiest to start with the smaller bills first when faced with many liabilities.  

For example, focusing on paying off a small amount of credit card debt before tackling a sizeable medical bill may help stay you stay motivated. In addition, paying down your debt will help you stop living paycheck to paycheck and free up more money to boost your liquid net worth.  

Save More Money

Finding ways to save money every month is essential to increase your liquid assets and helps you achieve good financial health. In addition, living a frugal lifestyle can help you put more cash in your pocket (or bank account) to improve your finances and live more comfortably. 

There are many ways to cut your household expenses, from meal planning to shopping around for cheaper insurance. Multiple small reductions in your monthly costs will add up over time. Be sure to designate where you want your newfound money to go, so you don’t end up spending it.

Sell Non-Liquid Assets

If you want to increase your liquid net worth, consider selling illiquid assets. For example, do you rarely use one of your cars? Why not sell it to put money in your bank account? Liquidating assets for cash is a sure way to bulk up your bank accounts.

Boost Your Income

Increasing your income is a great way to improve your financial situation. There are tons of ways to make more money. Asking for a raise at work, working overtime, or picking up a part-time job are all straightforward ways to bring home more money.  

If you want to make money on your own time, start a side hustle to make extra cash. The possibilities are endless when it comes to starting a side hustle. But, of course, the easiest thing to do is turn your hobby into a business.  

If you are up for learning something new, blogging is a great way to earn a side income. There are so many free and cheap courses to get you started. This course is the one I used to start my blog.  

Once you start a blog, you may want to consider joining a Mastermind Group, so you have mentors that help you grow and monetize your blog more quickly. Blogging is a long-term endeavor, so a supportive and helpful group to have your back is a must!

However you choose to increase your income, the important thing is what you do with your extra money. Avoid lifestyle inflation and live below your means to make the most of your money.  

Final Thoughts on Liquid Net Worth

Calculating your liquid net worth will give you an idea of where you stand financially. In addition, knowing your current money situation will help you establish appropriate goals to work toward achieving financial wellness. And achieving good financial health is a stepping stone to financial freedom.  

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