Liquid Net Worth: A Formula to Stop Living Paycheck to Paycheck

Compute your liquid net worth by adding up cash and assets you can quickly convert to cash, then subtracting debts.

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Liquid net worth is a calculation that helps determine the health of your financial safety net. It measures your ability to handle regular and short-term financial needs — and how well you meet your long-term money goals.

Have you heard the saying that someone is house poor? This is because the monthly costs of owning a home can sometimes drain so much household income that there's little money for anything else.

Or maybe you've heard people — even with high incomes — complain that they're living paycheck to paycheck.

These can be the symptoms of financial challenges brought on by having too little ready cash for the day-to-day costs of living. The money squeeze can also hamper the ability to save for future financial goals, such as vacations, major repairs and retirement.

If you spend most or all of what you earn and find it hard to save, improving your liquid net worth can be an important first step to breaking out of financial insecurity.

What is liquid net worth?

Liquid net worth is a subset of net worth, which is the overall calculation of what you own minus what you owe. Financial pros call it assets minus liabilities.

Liquid net worth uses the same formula but only considers cash and other holdings that can quickly become cash — minus what you owe.

It's a valuable number to check, whether you're just starting out or financially well-established but want to get a better handle on your spending and saving habits.

Exactly what are liquid assets?

Liquid assets are holdings that are in cash or can be converted into cash within a very short time. For example, if you have money in a checking, savings or money market account, you can withdraw it at any time without penalty or loss of value.

On the other hand, some things 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 a liquid asset. And if the quick sale of an investment would significantly decrease its value, it is not considered liquid.

Stocks and bonds are usually considered liquid because you can sell these investments and have a cash settlement generally within two business days. However, 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 likely not meeting the standards of a liquid asset. In addition, a high quantity of shares of an individual stock might also not be regarded as liquid because selling a large block all at once might impact its value.

Real estate, antiques, jewelry, collectibles and many other hard assets are generally illiquid because quick-turn sales might not be possible.

So liquid assets are easy to sell and access — and aren't subject to a sudden loss in value if converted to cash.

How to calculate your liquid net worth

Let's look at the following financial profile as an example.

Perhaps 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.

Remember, for liquid net worth, we excluded the house, car and retirement accounts. That's because you likely can't sell your home and vehicle quickly for cash, and generally, there is a penalty for withdrawing retirement assets before age 59 and a half.

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.

Why liquid assets are important

Liquid assets are required to meet everyday and emergency expenses. It's the cash or quick-to-convert-to-cash holdings needed to pay bills and cover costs planned or unexpected.

However, many Americans have their wealth tied up in illiquid assets, such as a home or retirement accounts. So, don't be surprised if your liquid net worth is a modest number. And having long-term assets where you can't immediately get to them is a part of building lasting wealth.

On the other hand, improving liquidity is more of a month-to-month exercise. So let's talk about how you can move the liquid net worth needle in real life.

How to improve your liquid net worth

Undoubtedly, liquid net worth is a big-picture view of your financial health. However, if you want to drill down to an everyday living snapshot, you'll want to track your cash flow. That's where you can see your spending in one place, by category, and identify opportunities to optimize your liquid net worth.

Once you know where your money is going, you can focus on improving your liquid assets by:

  • Trimming expenses. When you use a cash flow app, you'll identify "wants" that you can limit or eliminate, which will help you more easily fund "needs."

  • Reducing debt. Prioritize paying off high-interest debt first. As you do, you'll be freeing up more money for your cash cushion.

  • Saving more. A critical component of financial security is establishing and adding to your emergency fund.

  • Building long-term investments. After you've taken care of your short-term savings, you can contribute more to your retirement accounts.

One of the essential tools for building your net worth is deciding how to budget money.

Even if your net worth or liquid net worth is a meager number — or negative — the goal should be to slowly improve your bottom line. Move the needle to a positive or bigger value.

By paying attention to the fundamental tools of building wealth, time is on your side.