What is Liquid Net Worth?
Liquid net worth is the amount of cash you would have leftover after selling all of your liquid assets and paying off all of your short-term liabilities.
Society likes to talk about the huge net worths of individuals we follow in the media, whether business people, pro athletes or other celebrities.
For example, we might talk about an Elon Musk or a Mark Zuckerberg and talk about their net worth being $50 Billion, or $75 Billion, or $100 Billion.
Does this mean that they can go out and buy 50, 75, or 100 Billion worth of houses and cars?
Nope.
Because their net worth isn’t the same thing as their liquid net worth.
So we’ll need to discuss what liquid net worth vs net worth is which we’ll take care of in this article.
We’ll also discuss why it’s important to know what your liquid net worth is instead of just understanding your total net worth.
Let’s get going, shall we?
Liquid Net Worth vs Net Worth
Let’s discuss the difference before we go any further.
Liquid Net Worth
Liquid net worth is cash you’d have in hand today if you had to pay off your liabilities with your liquid assets.
Your liquid assets are things like cash and items that can easily convert to cash.
Cash is obviously cash.
But things like stocks and bonds would also be included.
I like to ask it this way, “if I needed to make a large payment in 3 days, but I had no cash in my bank account, what could I sell or convert to cash?”
Should you include personal contents in your liquid assets?
Maybe, but not at their retail value.
If you own some jewelry that’s worth $5,000 but you need to sell instantly, you’re going to be selling at a discount.
You would need to apply a discounted rate that you could quickly liquidate if you want to include these items in your liquid assets.
So the primary 3 to include in your liquid net worth are:
Cash
Stocks
Bonds
Something to note and keep in mind are the penalties and taxes you’d need to pay if converting to cash from your 401K or IRA.
These tools have specific rules from the IRS on what you are allowed to do and not do.
You can always get your cash out of these accounts, but it will come at a cost.
One of the exceptions is the Roth IRA, which has a few rules. You can always withdraw your contributions with no penalty since you’ve already paid taxes on this money. Other withdrawals have a few rules which you can dive into here on Investopedia if necessary.
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Liquid Net Worth Example:
Let’s say I have a $100,000 house, $10,000 in cash, and $15,000 in stocks.
If I have $5,000 in debt, then my liquid net worth is $20,000.
Liquid Assets: $10,000 in cash + $15,000 in stocks = $25,000
Liabilities = $5,000
Liquid Net Worth is:
Liquid Assets – Liabilities = Liquid Net Worth
$25,000 – $5,000 = $20,000.
Net Worth
This is simply all of your assets minus your liabilities.
This time you include other assets that you own, such as homes, businesses, rentals property, and cars.
Let’s keep it very basic to make it easy to figure out liquid net worth vs. net worth.
So let’s take our same previous example.
Total Net Worth Example:
Let’s say I have a $100,000 house, $10,000 in cash, and $15,000 in stocks.
If I have $5,000 in debt, then my net worth is $120,000.
All Assets: $100,000 house + $10,000 in cash + $15,000 in stocks = $125,000
Liabilities = $5,000
Net Worth is:
Total Assets – Liabilities = Net Worth
$125,000 – $5,000 = $120,000.
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Why Does Liquid Net Worth Matter?
Liquid net worth is a measure of how financially stable you are as of today.
It is crucial to understand liquid net worth vs. net worth to prepare for the future and potential financial emergencies.
Your liquid net worth equals an emergency fund if you lose a job or have a medical catastrophe.
Your total net worth is more important for your long term goals and financial stability.
But both are important to understand and keep track of.
How Can I Increase My Liquid Net Worth
If you want to increase your liquid net worth, you have a few options. Below are some ideas that can help you increase your liquid net worth.
Lower Your Expenses
Lowering your expenses sounds simple but can take concentrated effort if you’re already running a tight ship.
Expenses are your liabilities, so if you can figure out ways to lower your expenses you increase your net worth (what a business would call net income).
An easy place to start is credit card debt.
If you carry a balance, then chances are that you are paying a high interest rate.
Working on paying off these balances will save you at a minimum the amount of interest you’re paying each month.
If you don’t already have a budget, now is a great time to hunker down and make one.
If it seems overwhelming, just get started.
Even just beginning to get an idea of what you’re spending in different categories is better than nothing at all.
Related Reading: Make $100 Extra Cash Today
Increase Your Investments
Investing is a long term game but can help increase your liquid net worth (and total net worth).
Of course, no investment is guaranteed, so be sure to do as much homework as possible before investing.
If you want to get involved in the stock market, the fastest way to get your feet wet is with a company like Robinhood and Webull (you’ll get a free stock with my referral link!)
I highly recommend you purchase an index fund that tracks the entire S&P 500, which tracks the whole U.S. economy.
Increase Your Income
Companies are looking at how they can increase their revenue so that you can do the same.
Your only options are getting a higher paying job, asking for a raise, or starting a side business.
I love side hustles and have plenty of articles on ways you can make extra money — check out the articles below.
What about How to make an extra $1,000 a month
Or ideas on How to make $300 fast
Maybe read up on How to make $200 in a day
Final Thoughts on Liquid Net Worth
Maybe you were asking what does liquid net worth mean and what about liquid net worth vs net worth?
I hope I have helped shine a bit of light on those today.
Your liquid net worth is today’s picture of your financial health, while your net worth is the picture of your total financial health.
If you have any questions, feel free to join our private group and ask them there.
I love interacting and sharing ideas with you.
Good luck!
