Liquid net worth is a subset of net worth, which is what you own minus what you owe — or assets minus liabilities.
Liquid net worth only considers cash (and other assets that can quickly become cash) minus what you owe.
Why should you care about liquid net worth? Your total net worth might look solid on paper, but much of it could be locked up in a home or retirement account that you can't tap quickly (or without penalty).
If you lose your job, face a surprise medical bill or otherwise need money in a pinch, your liquid net worth tells you how much you could actually get your hands on in a matter of days.
What's considered a liquid asset?
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.
Certain equity compensation from your employer isn't liquid either. For example, unvested restricted stock units can't quickly be converted to cash.
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Stocks and bonds are usually considered liquid because you can sell these investments and have a cash settlement generally within one business day.
But if a stock is not actively traded, or its market price swings a lot — meaning selling it quickly could lead to a big loss — it's 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's say your assets include:
- A house worth $300,000.
- A car worth $30,000.
- You also have a 401(k) and a traditional 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). 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 if you withdraw before age 59½, there's generally a penalty.
The checking and savings accounts are held in cash, and the brokerage account holdings can be converted to cash within a couple of days by selling the mutual funds, so they are considered liquid.
Your liabilities total $112,000 (the loans on the house, car, student loans and credit cards). You still owe your debts regardless of what you sell, so they all stay in the liabilities column.
The liquid assets of $116,000 minus liabilities of $112,000 equals $4,000 liquid net worth.
Calculate your liquid net worth
How to balance liquid and illiquid assets
If you do your calculations and your liquid net worth number is small or negative, 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 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 a credit card or other high-interest loan.
Working with a financial advisor can help you determine how much of your money to keep liquid and how much to invest.
» See our picks for the best high yield savings accounts
How to boost your liquid net worth
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 down on "wants." Reduce or eliminate spending on expenses such as streaming services and dining out, and redirect that money to savings.
- Pay down debt, prioritizing high-interest debt — like credit cards — first. As you do, you'll improve your liquid net worth.
- Save more money. Consider automatically 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: Calculate your net worth
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