Money equals wealth, right? Well, not quite. We hear a lot about making money and building wealth, but not a lot about the difference between your overall net worth vs liquid net worth. Spoiler alert: both matter, but your liquid net worth tells a lot more about your current financial wellness.
Let’s dive into what each type of net worth means, how to calculate liquid net worth, and what your net worth means for you and your legacy.
What is liquid net worth?
When it comes to money, liquid means available. Meaning, it’s not money that’s locked up in long-term investments or physical objects. Your liquid net worth is all the financial resources you’ve acquired that are immediately accessible to you. It’s the wealth you can lean on in case of emergency, or whenever you want to make a big money move.
Overall net worth vs liquid net worth
Basically, your net worth is all your assets (things you own that hold some value) minus all your liabilities (things that you owe money on).
Most of your overall net worth comes from fixed assets. One prime example is real estate. Your house might be “worth” $250,000 on the market but doesn’t convert to cash-in-hand. Even if you were to sell it for full market value, you’d have to deduct realtor fees, taxes, repairs, etc. before getting the real “value” of the home.
Other fixed assets include long-term investments, like your retirement fund. Your IRA or 401K is “your” money, but you can’t use them without penalty until you come of age or in very particular cases. Plus, depending on what you invest in, you might be taxed heavily when you start drawing money in retirement.
On the other hand, liquid net worth only takes into account your “liquid assets”. For most people, this makes your liquid net worth significantly lower than your overall net worth.
Examples of assets that make up liquid net worth
Your cash savings are liquid. So, this would include your checking account, savings account, and any certificates of deposit. This includes money saved in banks or credit unions.
Even though they’re part of your long-term wealth-building strategy, stocks and bonds still fall under the “immediately available” category. As long as they’re not invested in your official retirement fund, your investments can be easily and quickly sold and you will receive your cash almost immediately.
Anything else that relies on finding the right buyer at the “right” price to turn it into cash isn’t considered liquid. You can’t depend on so many factors outside your control. However, if you want to sneak some of your fixed assets into your liquid net worth, a good rule of thumb is to undervalue those assets by at least 20% when you make your calculations.
This takes into account transaction fees and differences in your perceived value vs what you actually receive. To find these values, refer to receipts, see what the market value is now (be sure to deduct some for depreciation), or hire an official appraiser.
Calculating liquid net worth
So on to what we’ve all been waiting for—how to actually calculate your liquid net worth.
Add up all your liquid assets. (Or if you want to include your fixed assets, use that 20% rule.) Let’s say you have:
- $25,000 in your savings account
- $15,000 in your checking account
- $35,000 invested in stocks and bonds
Your total liquid assets equal $75,000.
Then add up all your debts. Imagine you have:
- $150,000 left on your mortgage
- $3000 due on a car loan
- $30,000 in student loans
Your total liabilities equal $183,000.
Next, subtract your liabilities from your assets. Hopefully, you come up with a positive number. But if you have more debt than assets, like in the case above, you can work toward the goal of positive net worth.
Note: The person above could have a positive net worth if they factor in the resale value of their home and car, jewelry and collector’s items, and retirement funds. It’s their liquid net worth that’s negative.
How to improve liquid net worth
While it’s harder to increase your assets, remember that net worth is calculated as a ratio of assets to liabilities. So one of the fastest ways to improve your net worth is to lower your debt. Find the right debt repayment strategy that works for you, even on a low income.
That said, if you’ve eliminated your debt or are almost there, you can also focus on building up your savings. This will increase your assets, and therefore your liquid net worth. If saving has been difficult for you in the past, you might consider automatic transfers, separate savings accounts, and building a “savings” line into your budget.
And of course, one way to increase your liquid assets is by earning more. Take on a side gig, rent out a room, or negotiate for a pay raise. Check out our breakdown of what average net worth looks like by age.
Build that wealth
As you build up assets, you’re also laying the groundwork to pass on generational wealth. Focusing on a healthy liquid net worth allows you to live life to the fullest now while also making decisions that affect your legacy. Ultimately, the better you understand how to strike the balance between your overall net worth vs liquid net worth, the better you’ll be able to control your financial destiny.