Understanding your financial health is an important step towards reaching your financial goals. One commonly used key metric that helps paint a full picture of your financial standing is liquid net worth. In this post, I’ll help you get familiar with what liquid net worth is, why it matters, and how to calculate your liquid net worth. To go a step further and make things even clearer, we’ll also walk through a practical example.
What is Liquid Net Worth?
Liquid net worth is a measure of your total financial value, taking into account only liquid assets. Liquid assets are considered to be those that can be quickly converted into cash without significantly impacting their value. These typically include cash, savings accounts, stocks, bonds, and other investments that can be readily sold.
Why is Liquid Net Worth Important?
Knowing your liquid net worth provides a more accurate representation of your financial strength in the short term. It excludes non-liquid assets like real estate and vehicles, giving you a clearer understanding of the resources you can access immediately. This can be an important piece in emergencies or when making quick financial decisions.
How to Calculate Liquid Net Worth
To calculate your liquid net worth, follow these simple steps:
1. Identify Your Liquid Assets:
Liquid assets include cash and anything that can easily be converted to cash. Some basic examples are:
- Cash in hand
- Cash in checking and savings accounts
- Investments such as stocks and bonds
- Certificates of deposit (CDs)
- Money market accounts
2. Add Up Your Liquid Assets:
Sum the values of all the identified liquid assets. Be sure to use the current market value for investments.
3. Subtract Your Liabilities:
Deduct any outstanding debts or liabilities from the total value of your liquid assets. This may include credit card balances, outstanding loans, or other financial obligations.
4. The Formula:
Liquid Net Worth = Total Liquid Assets – Total Liabilities
Example
Let’s walk through an example:
Liquid Assets:
- Cash in hand: $500
- Savings account: $5,000
- Stocks: $10,000
- Bonds: $2,000
Total Liquid Assets:
- $500 + $5,000 + $10,000 + $2,000 = $17,500
Liabilities:
- Credit card balance: -$1,000
- Personal loan: -$3,000
Total Liabilities:
- -$1,000 + -$3,000 = -$4,000
Liquid Net Worth:
- $17,500 – $4,000 = $13,500
In this example, the individual’s liquid net worth is $13,500.
Wrap Up
Calculating your liquid net worth is a valuable exercise in gaining financial clarity. By focusing on assets that can be quickly turned into cash, you’ll have a more realistic understanding of your financial standing. Regularly revisiting and reassessing your liquid net worth can help you make informed decisions and stay on track toward your financial goals.