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Liquid net worth is a subset of net worth, which is what you own minus what you owe. Financial pros call it assets minus liabilities.
Liquid net worth only considers cash (and other assets that can quickly become cash) minus what you owe.
What are considered liquid assets?
The money you have in a checking, savings or money market account? That's liquid. You can withdraw it at any time without penalty or loss of value.
Some other assets are "illiquid." For example, if you have to hold an asset for an extended time, perhaps 30 days or more, before it can be issued as cash, it is not liquid. And if the quick sale of an investment would significantly decrease its value, it is not considered liquid.
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Stocks and bonds are usually considered liquid because you can sell these investments and have a cash settlement generally within two business days.
But if a stock is not actively traded, or has a volatile market price that might cause a significant loss in the event of a quick sale, it is probably not a liquid asset.
Real estate, antiques, jewelry, collectibles and many other hard assets are generally considered illiquid because quick-turn sales might not be possible.
How to calculate your liquid net worth
Look at the following financial profile as an example.
Let' say your assets include:
- A house worth $300,000.
- A car worth $30,000.
- You also have a 401(k) and an IRA worth a combined total of $250,000.
- There is $6,000 in your checking account.
- You have $10,000 in a savings account.
- And $100,000 in mutual funds in a brokerage account.
As for your financial liabilities, you owe:
- $100,000 on the home.
- $5,000 on the car.
- $5,000 in student loans.
- And $2,000 on credit cards.
Here's how your liquid net worth would be calculated:
Your liquid assets total $116,000 (the total of the checking, savings and brokerage accounts).
Your liabilities total $112,000 (the loans on the house, car, student loans and credit cards).
The liquid assets of $116,000 minus liabilities of $112,000 equals $4,000 liquid net worth.
For liquid net worth, we excluded the house and car. That's because you may not be able to sell your home and vehicle quickly for cash. We also left out your retirement accounts, because generally, if you withdraw before age 59½, there's a penalty.
The checking and savings accounts are held in cash, and the brokerage account holdings can be converted to cash within two to three days by selling the mutual funds, so they are considered liquid.
How to balance liquid and illiquid
If you do your calculations and your liquid net worth number is small, that's OK.
A lot of people have the bulk of their wealth in illiquid assets, such as a home or retirement accounts. Having long-term assets where you can't immediately get to them is one way to build wealth and avoid impulse spending.
The goal is to at least have a robust emergency fund. Financial advisors recommend having enough money in liquid assets (aka in your bank account) to pay for three to six months of living expenses. Many pros suggest putting your emergency fund in a high-yield savings account.
That way, if you need money for an unexpected expensive home repair, or if you get laid off, you don't have to rely on credit.
Working with a financial advisor can help you determine how much of your money to keep liquid and how much to invest.
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If you want more liquidity, track your expenses. Use a budgeting app to help you see how you're spending your money, then you can reallocate as needed. You can:
- Cut expenses. When you create a budget, you'll identify "wants" that you can limit or eliminate, which will help you more easily afford "needs."
- Reduce debt. Prioritize paying off high-interest debt first. As you do, you'll be freeing up more money for your cash cushion.
- Save more money. Consider directing a certain amount of your paycheck to your savings account to help you stash more cash.
Even if your net worth or liquid net worth now is a meager number — or negative —you can work to improve your bottom line.
» RELATED: What is your net worth?
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