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Liquid Net Worth Definition: How to Calculate

What is Liquid Net Worth?

Liquid net worth is the amount of money you have in cash and assets you can convert to cash in a relatively short time minus the total outstanding liabilities (your debts) you owe. Your liquid net worth provides an important snapshot of your current financial position.  In this article, we will further define liquid net worth, how to calculate it, and how to increase it.

A financial advisor can offer advice on retirement, investing, financial planning and various other areas of finance. Find a financial advisor in your area today.

Understanding Liquid Net Worth

Before we further explain what liquid net worth is, it is important to understand what net worth is. Some people might have an idea what a net worth is. If you don’t know, a person’s net worth is the dollar amount of his or her assets minus his or her debts.

Your assets can range from anything you own such as cash in a checking account and your debts may include a mortgage, car or student loan or credit card balances.

You can calculate your net worth by substracting your liabilities (i.e., debts) from your assets. An asset is something that you own and a liability is something that you owe.

If your assets are greater than your liabilities, then you have a positive net worth. Conversely, if your liabilities are greater than your assets, then you have a negative net worth.

Liquid net worth, on the other hand, is part of your net worth that is liquid. In other words, it is cash on hand or an asset that can quickly turn into cash.

For example, checking or savings accounts, stocks and bonds can quickly be converted into cash; you can quickly access them if you need them immediately. Whereas real estate is an asset that can’t be quickly turn into cash.

So a real estate property would not be qualified as a liquid net asset and would not be considered in your liquid net worth calculation.

How to Calculate Liquid Net Worth

Liquid net worth is calculated by substracting all liabilities from your liquid assets.

Calculating your liquid net worth can be a simple process.  However, it requires you to gather all of the information surrounding your assets and liabilities. You should keep a folder with information on all your financial assets and liabilities and update the folder every year.

Calculate your liquid Assets

Start by listing your liquid assets. Remember, some assets are liquid and some are not. Some examples of liquid net assets include:

  • Cash,
  • Certificates of deposit
  • Money market accounts
  • checking and savings accounts
  • Treasury bills
  • Retirement plans (401k, IRA, 403b),
  • Taxable brokerage accounts (i.e., stocks)
  • Pensions
  • Annuities
  • Life insurance and cash value
  • Bonds
  • Exchange-traded funds (ETFs)
  • Other investments

Assets that are not liquid include houses/rental property, rare valuables (i.e., coins) land that you already own. So, they should not be considered as part of your calculation.

Now, add up all of the assets you have listed above. This number should represent your total assets.

Calculate Your Liabilities

Start by gathering your largest liabilities such as your mortgage balance, car loans. Next, list al of your personal liabilities such as credit card debts, student loan debt, medical debt or any other debt you may owe.

Now, add up the balances on all of the liabilities you have listed above. This number should represent your total liabilities.

Calculate Your Liquid Net Worth

To calculate your liquid net worth, you simply add all of your liquid assets and substract them from all of your liabilities. The result is your liquid net worth. Do this once a year and compare it with the previous year’s number. This will give you an idea if you’re making progress or not. 

Ways to Increase Your Liquid Net Worth

You may not think about it, but increasing your liquid net worth matters. It matters because you might need a lot of cash in an urgency. For example, you might need to come up with $80,000 cash for a down deposit for a rental property.

You might also want to own a franchise, and most franchises have a certain liquid cash requirement. So, if your liquid net worth is two low or in the negative, it might be time to take some steps to increase it. Here are some of the ways, you can grow your liquid net worth.

1. Save and invest money aggressively.

Saving and investing money aggressively isn’t easy for most people. It’s even harder if you’re barely making ends meet. But the more money you can save and invest, the more you can grow your liquid net worth.

A high yield savings account, like CIT Bank, can help you hit your savings goals faster.

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2. Reduce your expenses.

The less money you spend, the more you’re accumulating in net worth. See if there are areas in your budget where you can can cut back. If spending money is a problem, find ways to help you manage your money.

3. Pay off your high interest debt.

Paying off your high interest debt is also a good way to increase your liquid net worth. The reason is simple: you end up earning more by paying off a credit card debt than by saving and investing. For example, paying off a credit card with a 22% interest rate is the same as earning 22% on an investment.

4. Reduce your monthly banking fees.

You may not think about it, banking fees/charges can eat a significant portion of your savings. So one way to increase your liquid net worth is to find ways to reduce bank charges such as ATM fees and monthly checking charges, or eliminate them entirely.

To do so, shop around for a bank that waives these charges. Some banks will waive your monthly checking charges as long as the balance in your checking and savings accounts meet the minimum requirement.

Reducing bank charges or eliminate them will help you save hundreds of dollars a year and thus increase your liquid net worth.

5. Max out your retirement plan.

Maxing out a retirement savings plan like a 401k plan is a great way to increase your liquid net worth. One main reason for that is that many employers will match a portion of the amount or the equal amount you’re contributing into that plan. That’s an immediate 50% return on your cash.

Bottom line:

Liquid net worth is the amount of money you have in cash and assets you can convert to cash in a relatively short time minus the liabilities you owe. It is similar to net worth, except that it doesn’t include assets that are non liquid such as real estate. Your liquid net worth is a good way to measure your financial health as it shows how prepared you are to meet financial obligations.

Related: 9 Easy and Painless Ways to Save for Retirement

Related topics on how to increase your liquid net worth:

Speak with the Right Financial Advisor

You can talk to a financial advisor who can review your finances and help you reach your goals. Find one who meets your needs with SmartAsset’s free financial advisor matching service. You answer a few questions and they match you with up to three financial advisors in your area. So, if you want help developing a plan to reach your financial goals, get started now.

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