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One of the most important numbers you can track is your Net Worth. It’s probably the best gauge of whether you are making positive or negative decisions with your money.
I personally use Personal Capital to track mine, but you can also use a simple spreadsheet to put it together as well.
The basic formula is:
ASSETS (what you own) – LIABILITIES (what you owe) = Net Worth
The BIG IDEA is that you work hard to earn your money, and you should work equally as hard to save and invest it as well, so that all of your money doesn’t simply disappear. Tracking your net worth will give you a great starting point to see how well you have saved and invested your earnings.
But tracking your Liquid Net Worth is slightly different, and also has a different purpose in your financial life.
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What Is Liquid Net Worth?
Your liquid net worth is the value of everything you own if you were to liquidate it (convert it to cash) immediately.
The idea is to come up with a number that shows you what amount of cash you could come up with relatively quickly.
Now, there is no standard definition of exactly what “immediately” means.
Some suggest that for your assets to be liquid, you would need to be able to convert them to cash within 24 hours. Other say 1-week, and yet others say within a month or so (myself included).
The challenge is that getting cash from your bank is easy, selling a stock or bond is relatively easy, but selling assets like a car or house most likely will NOT happen within 24 hours, or a week.
But for the purposes of the Liquid Net Worth calculation, we will include those assets (with some caveats).
Why Is Liquid Net Worth Important?
The goal of calculating your liquid net worth is to see how much you have available in case of an emergency.
If you need to access cash quickly, most people look at the balance in their bank account (or available credit on their credit card, which I do NOT recommend).
But if you REALLY need the money, you need to consider all avenues of getting access to cash, including selling all of your assets.
I am a fan of having an Emergency Fund in place for life’s detours, and an even BIGGER fan of having an Emergency Budget in place to have a plan for spending your money when you are living in a financial emergency (job loss, for example).
But in addition to your Emergency Fund, there are several other ways to get money. This includes selling your investments, your possessions, and even your home (if needed).
Coming up with a total liquid net worth can actually help you relax a bit about your financial situation, because it could reveal that you have more available than you thought.
For me, knowing that I have several assets beyond the cash in my emergency fund helps me sleep at night. Really!
How To Calculate Your Liquid Net Worth
To calculate your liquid net worth, add together ALL of your liquid assets minus your secured debts.
Liquid Assets – Secured Debts = Liquid Net Worth
Here’s a quick run-down of the assets you need to count :
- Cash (Check and Savings)
- Taxable Investments (Stocks, Bonds, Etc.)
- Retirement Accounts (401k, IRA, HSA, 403b, Etc.)
- Possessions (jewelry, collectible, anything you can sell)
Note: You will need to apply an appropriate “discount” to anything that you need to sell. For example, to sell your car quickly, you cannot command the full value. You will need to discount the price to get it sold.
So here are the discounts I would use when calculating your liquid assets:
- Cash – No discount
- Taxable Investments – Your tax rate (estimate around 20%)
- Retirement Accounts – On average, 10% + your tax rate (estimate around 30%)
- Cars – 25% discount
- Houses – 25% discount (includes fees associated)
- Possessions – 50% discount to sell quickly
Now here is a list of the secured debts you need to count:
- Home mortgage
- Car Loan
- Any loan attached to an asset you need to sell
You may be asking “but what about other debt, like credit cards, student loans, etc.?“
During an emergency, I will not be worried about my unsecured debts, because they don’t immediately take away from my liquid assets.
The idea is to get the net sum of all of your assets minus the debts you need to pay off to convert them to cash.
Liquid Net Worth Example
Here’s a quick example of what your liquid net worth could look like:
|Liquid Net Worth||$68,500|
As you can see, though their total net worth might look high, when it comes to converting the assets to cash, there is a lot of money lost.
But this is the reality of using your liquid net worth as a gauge for how much cash you could ACTUALLY come up with quickly.
Ways To Increase Your Liquid Net Worth
If you calculate your number and are feeling a bit nervous about the LACK of money you have available, there are several ways to start increasing your liquid net worth right now.
Lower Your Expenses
The less money you waste, the more you can save. Getting on a budget and tracking your expenses can reveal some places you can stop spending your money on.
One of the ways you can quickly cut your expenses is to audit your subscription services (not just Netflix, but box services, music, apps, everything!).
There is actually a FREE service that will do this for you called Trim. You simply connect your bank accounts, and it will find ALL your subscriptions for you. You can cancel the ones you don’t like, and Trim will even negotiate a BETTER rate on the ones you want to keep (internet, cell phone, etc.)
Automate Your Savings
If you agree with the term “pay yourself first”, the easiest way to do this is to automate your savings. The idea is to open a high-yield savings account and schedule regular deposits the day after payday.
For example, I personally use a CIT Savings Account, and you can set up a bi-weekly transfer of any amount to start building your savings. You can start small (maybe $50), and eventually you will forget about that money, and your savings builds automatically.
Don’t Do Car Debt
The more you borrow, the less you have. Especially when it comes to your cars. One of the quickest ways to grow your liquid net worth is to OWN your car.
Related: Read my guide on how to DESTROY your car loans forever.
Once you pay off your cars, you can simply create a “new car fund” savings account and make sure you buy all future cars in cash. This takes some discipline and patience, but will give you major Financial Freedom, and increase your net worth in a big way!
If you aren’t investing regularly yet, I recommend getting started today. I always recommend your work 401k match first, then opening a Roth IRA (which is the MOST liquid type of retirement account).
M1 Finance is a SUPER simple app that makes it easy to get started investing on the regular. You can start with as little as $1 in a regular taxable account, or even open a Roth IRA with as little as $500.
They give you access to Vanguard index funds (which I personally own), and the mobile app makes it easy to set up your account and get started.
They also have NO FEES, and NO COMMISSIONS on any trades you make, which gives you total control of your investments, and all the upside of the growth!
Get A Side Hustle
If you simply need some extra income to boost your savings rate, check out these 20 ways to make money on the side.
Liquid Net Worth FAQ
What Is A Liquid Asset?
A liquid asset is anything you own that you can convert to cash (relatively quickly). This includes cash, stocks, bonds, investment accounts, and even your cars and home(s).
Anything you have of value that you can trade for cash is a liquid asset.
Is A 401k Considered A Liquid Asset?
Yes. Though you will be penalized and taxed on your withdrawal (probably about 30% total), you are able to access this money if needed. It may take a few days to sell the investments and distribute the money, but it is definitely liquid.
Now, most people (including myself) do NOT recommend tapping into your 401k at all, but it can be converted to cash if you REALLY need it.
Are Your House And Cars Liquid Assets?
Yes. These can be converted to cash. Admittedly, it is MUCH more difficult to sell a house than a car, and the paperwork and details will make this at least a 6-week process.
But both of them can be sold and converted to cash. Again, these are typically LAST RESORT options, and most would NOT convert these to cash unless they are in a life-altering financial bind.
What Is NOT Part Of Your Liquid Net Worth?
Many people would define cars, houses, and other personal possessions that you cannot sell quickly WITHOUT a major financial loss “non-liquid assets”
I say that when push comes to shove, if you absolutely HAVE TO sell your house, cars, etc. to come up with cash, you will.
So unless you have money locked up legally (in a business, trust or otherwise), I would say almost any asset you own could be considered a liquid asset.
Can I Have A Negative Liquid Net Worth?
Yes. This typically happens when you spend more than you make, and borrow for depreciating assets.
For example; if you own a car worth $10,000, but owe $15,000, and have no savings or other assets, then you have a negative liquid net worth.
I would qualify this situation as living beyond your means, and recommend living on an Emergency Budget until you are able to save up an Emergency Fund.
Though many consider your liquid net worth to ONLY include you cash and investments available outside of your retirement accounts, I think that is short-sighted and limiting.
I recommend using the calculation above to come up with YOUR liquid net worth, which in turn may give you some peace of mind about your financial situation.
Then start tracking your net worth over time (using an app like Personal Capital) or a spreadsheet, and make sure it’s always going UP!