What is your liquid net worth?
If you’re asking this question, you probably already have a pretty good handle on your personal finances and are looking to dive deeper. While net worth is an important measure, I would argue that liquid net worth is even more important to determine your financial health.
To take a popular example, Amazon founder Jeff Bezos has a total net worth of almost $200 billion as of this writing. But he doesn’t just have a swimming pool filled with $100 bills (ok, maybe several swimming pools) – his money is tied up in the value of his company and can’t easily be accessed. The liquid net worth of Jeff Bezos – the amount of money he could access right now – is far less than $200 billion.
While ol’ Jeff could probably weather any financial storm that came his way, you and I are not Jeff Bezos. Calculating your liquid net worth is an important part of understanding how you would fare in a financial crisis.
Liquid Net Worth Definition
Liquid net worth is simply the amount of cash you would have available after selling all of your liquid assets and paying off your current liabilities. The difference between your total net worth and your liquid net worth is in identifying your liquid vs. non-liquid asset.
So liquid net worth is defined as:
Liquid Net Worth = Liquid Assets – Current Liabilities
This is similar to the business definition of net liquid assets, which is a measure of a business’ available short term assets less short term liabilities. If you think of your household finances like its own business (which you should), then your liquid net worth shouldn’t include assets that aren’t easily converted to cash (such as retirement accounts, real estate, etc.) or liabilities that aren’t due immediately (such as your mortgage, student loans, etc.)
Your liquid net worth represents the amount of money you could easily come up with on short notice without jeopardizing your ability to pay your immediate bills.
Net Worth vs. Liquid Net Worth
Your net worth is the total value of all of your assets (things you own) minus your liabilities (things you owe).
Net Worth = Assets – Liabilities
When considering your liquid net worth vs. your net worth, your liquid net worth only counts your liquid assets and your current (not long-term) liabilities. So if you knew your net worth, you could calculate your liquid net worth by subtracting your non-liquid assets and adding back in your long-term liabilities.
Liquid Net Worth = Net Worth – Non-Liquid Assets + Long-Term Liabilities
The Importance of Liquid Net Worth
While the difference between liquid net worth and total net worth might not seem like a big deal, each metric measures very different things. Net worth is the sum total of all the assets you own minus the debts you owe.
Liquid net worth measures how much of your wealth is easily accessible during an emergency or other scenario when you need quick access to cash.
Your liquid net worth essentially acts as an emergency fund of sorts, and helps you understand how much money you would have available if your car broke down, or you lost your job.
As an example, consider two people with the same net worth of $1 million. Let’s call them Liquid Lily and Non-Liquid Norbert (yes, I do amuse myself, thank you). For simplicity we’ll also say they have no liabilities (debt).
Liquid Lily has $200,000 in a savings account, and $800,000 in stock and bond investments. She rents her home so doesn’t own any real estate. Non-liquid Norbert owns a $700,000 house free and clear, and has $100,000 in the bank and $200,000 in stock investments.
If you add up all of their assets, each of their total net worth is $1,000,000. However, Non-liquid Norbert has a huge chunk of his net worth tied up in a hard asset (his house), so his liquid net worth is only $300,000 compared to Lily’s fully-liquid $1,000,000 net worth.
What Are Liquid Assets?
Liquid assets are any assets you own that could be easily converted into cash, such as stocks and bonds or money in a savings account.
Here are some of the major types of liquid assets.
Cash and Cash Equivalents
Obviously, cash on hand, whether in your wallet or stuffed under a mattress, would be considered liquid. Other forms of money that are easily accessible could be stored in:
- checking accounts
- savings accounts
- money market accounts
- short-term CDs (certificates of deposit)
Stocks and Bonds
Marketable securities such as stocks and bonds would be considered liquid because they can be easily sold and converted to cash. Just make sure they are in a regular brokerage account and not a retirement account such as a 401(k), as there would be a hefty penalty for accessing retirement funds, and these are generally not considered liquid (unless you are past retirement age). Some examples are:
- individual stocks
- ETFs and mutual funds
- U.S. Treasuries
- bonds and bond funds
What Are Non-Liquid Assets?
Non-liquid assets are assets you own that cannot be easily converted into cash, due to high transaction costs, long timeline for sale, or other factors.
Here are some of the major types of non-liquid assets.
While I love real estate investing, most forms of real estate are definitely not liquid. This includes your own personal home. Some of the main things that make real estate a non-liquid asset include:
- it could take 3-6 months or more to sell a house once it’s on the market
- transaction fees in the form of real estate commissions and closing costs are high (typically 8-10% of the sales price)
- if you need to sell quickly, you will generally need to take a significantly discounted offer
Similar to real estate, retirement accounts do not fit the definition of a liquid asset. While there are limited situations where you could take a withdrawal before retirement, you would generally have to pay a 10% penalty on top of the taxes due.
Raiding your retirement accounts for a short-term emergency should be avoided if at all possible. Retirement accounts include:
- Traditional and Roth 401(k)
- Traditional and Roth IRA
- Solo 401(k) if self-employed
Most other hard assets you own that may contribute to your overall net worth are also non-liquid, such as:
- art and other collectibles
While these assets do hold value, they would be difficult to sell quickly, or you would have to take a steep discount in order to sell. Nobody wants to take their wedding ring to a pawn shop just to cover the cost of an emergency!
What Are Current Liabilities?
Understanding what counts as a liquid asset is the first step to calculating your liquid net worth. The other side of the equation is to understand your current liabilities, which are debts that you owe in the short term.
While there is no one set definition of what counts as a “current” liability for purposes of calculating liquid net worth, in the business world current liabilities are generally those debts and expenses due within the next 12 months.
Since liquid net worth is a measure of your ability to weather a financial storm, I would recommend using anywhere from 1 – 12 months worth of payments on your debts and other liabilities depending on your situation.
Some examples of current liabilities would include:
- Mortgage payments due in the short term (next few months, not the entire mortgage debt)
- Car payments due in the short term
- Taxes due in the short term
- Any other debt payments due in the short term (student loans, credit cards, etc.)
How to Calculate Liquid Net Worth
The calculation for liquid net worth is simply your total liquid assets minus your current liabilities. This gives you your total liquidity – the amount of money you can access on short notice.
Liquid Net Worth = Liquid Assets – Current Liabilities
Of course, the hard part is listing out all of your assets and liabilities if you’ve never done it before. If you need some help in the process, I’ve written a whole post on creating a personal net worth statement, including a free Excel template to get you started.
I would also be remiss if I didn’t suggest a helpful app I use to automatically update and monitor my net worth: Personal Capital. This free app allows you to link your bank and investment accounts to automatically track your net worth.
Liquid Net Worth Calculation Example
To help you visualize what it looks like to calculate your own liquid net worth, here is an example.
First, on a spreadsheet or piece of paper, list out all of your liquid assets:
- Checking Account: $10,000
- Savings Account: $40,000
- Brokerage Account (Stocks): $20,000
- Total Liquid Assets: $70,000
Next, list out all of your current liabilities. For this example, we’ll use 1 month of debt payments:
- Mortgage Payment: $1,500
- Car Payment: $500
- Credit Card Payment: $1,000
- Student Loan Payment: $300
- Total Current Liabilities: $3,300
Finally, subtract your current liabilities from your liquid assets to get your liquid net worth:
Liquid Assets ($70,000) – Current Liabilities ($3,300) = Liquid Net Worth ($66,700)
As you can see from this example, your liquid net worth is $66,700, which means you have a significant cash cushion that you could access quickly for any number or reasons, such as:
- emergency home repairs
- investment opportunity in your friend’s business
- down payment on a new home
How to Increase Your Liquid Net Worth
If your liquid net worth is low or even negative, don’t despair. Tracking your net worth is the first step toward improving it. Next, set a goal to increase it. There are many ways to improve your net worth!
Here are just a few suggestions that have worked for me.
1. Lower Your Expenses
I always set a goal to pay off my credit card balance in full every month. Not only is it high-interest, expensive debt, it also contributes to your liabilities and impacts your liquid net worth.
There are many other things you can do to lower your expenses, but just like with your net worth, it is hard to reach your goals unless you track your spending and set a budget.
FURTHER READING: How to Start a Budget – Recommended Budget Percentages
For every dollar you save each month, you are potentially increasing your liquid net worth by the same amount.
Here are some other areas to save money:
- Negotiate your monthly bills with Trim
- Lower your grocery bills (here’s how we save $100+/month on groceries)
- Shop your home and car insurance rates
- Pay off debt
2. Increase Your Income
There’s only so much you can do to lower your expenses, which is why I generally prefer to focus on increasing my income. In my own financial journey, I’ve focused heavily on real estate investing and other side hustles to add to my income.
Focusing on your career is another great way to increase your income. Whether that means going back to school to find a better-paying job, or doing great work where you are and looking for promotion opportunities, every dollar counts toward increasing your net worth.
Here are some of my favorite ways to increase your income every month:
Frequently Asked Questions
How do you figure out your liquid net worth?
Liquid net worth can be calculate by subtracting your current liabilities from your liquid assets. Liquid assets include anything that can be quickly converted to cash, and current liabilities are those debt payments and other liabilities that are due in the short term (1-12 months).
What is the difference between net worth and liquid net worth?
Your total net worth includes all of your assets (what you own) and liabilities (what you owe), including non-liquid assets such as your house, car, and retirement accounts, and long-term liabilities such as student loans and mortgages. Your liquid net worth includes only liquid assets that are easily converted to cash, and short-term liabilities, such as next month’s mortgage payment or your credit card bill.
Your total net worth gives you a picture of your overall financial strength and balance sheet, while liquid net worth shows how much money you have available that is quickly accessible in case of emergency or other financial hardship.
Is a 401(k) part of liquid net worth?
No, your 401(k) is generally not part of your liquid net worth if you are not yet at retirement age. The money in a 401(k), IRA, or other retirement account has specific rules around when and how it can be withdrawn, and usually a withdrawal would incur a penalty of 10% or more plus any taxes due if taken out early.
Does net worth include liquid assets?
Yes, your total net worth includes both liquid and non-liquid assets. However, your liquid net worth would ONLY include your liquid assets.
Final Word on Liquid Net Worth
Liquid net worth is an important measure of your financial health. Along with total net worth, it can help you determine where you are along the path to financial independence.
There is always a balance – too much liquidity can mean that you aren’t putting your money to good use to earn a return (your cash sitting in the bank is only earning a tiny return compared to other investments). But not enough liquidity can spell trouble if you lose your job or the economy turns south. Just ask anyone who owned an AirBNB during the COVID crisis – they were sitting on a non-liquid property earning zero income.
No one could have predicted the extent of the pandemic, but those with emergency funds and liquidity were in a much better position to weather the storm.