As you begin your financial journey or start focusing on building wealth, you have likely come across the term net worth. This is the total value of your assets minus your liabilities. While this number gives a general overview of your finances, there is another metric that offers an even clearer picture of your current financial health: liquid net worth.
Liquid net worth tells you how much of your wealth can be quickly converted into cash. Understanding this number is simple, but it can be eye-opening once you apply it to your own finances.
Net Worth vs. Liquid Net Worth
Your net worth includes everything you own, such as retirement accounts, real estate, business equity, investments, and personal belongings, minus everything you owe. Liquid net worth focuses on the portion of your assets that can be turned into cash quickly and with minimal loss in value.
Many wealthy individuals may have large net worths but very low amounts of readily available cash. For example, someone like Jeff Bezos holds most of his wealth in company stock and other illiquid assets. These cannot be sold instantly and may fluctuate in value. This is why net worth and liquid net worth can look very different.
Why Liquid Net Worth Is Important
You know what you can access in an emergency
Emergencies often require quick cash. If you do not have enough in your bank account, liquid net worth helps you understand which assets you could sell immediately. Illiquid assets such as real estate or business equity cannot be relied on in urgent situations.
It reveals your true financial security
Many people feel financially stable until they calculate their liquid net worth. If the number is lower than expected, it can be a helpful wake-up call. If the number is strong, it can provide peace of mind and reduce financial stress.
It encourages building an emergency fund
Seeing your liquid net worth laid out clearly can motivate you to save. An emergency fund should cover at least a few months of expenses, and calculating your liquid net worth shows whether you are on track.
It helps measure progress toward financial independence
Most people track financial freedom by total net worth. However, liquid net worth shows how much you can access without penalties or long waiting periods. If you want to retire early, this number becomes even more important since retirement accounts may not be accessible without fees.
Liquid vs. Non-Liquid Assets
Liquid assets
Liquid assets are items you can convert into cash quickly. These include:
- Cash: Checking accounts, savings accounts, and money market accounts are highly liquid since you can access the money instantly.
- Stocks and bonds: Investments in a brokerage account can usually be sold within a few days. You may owe taxes on gains, but the process is fast.
- Precious metals: Gold, silver, and similar assets can often be sold quickly, whether through a brokerage account or a local dealer.
Non-liquid assets
Non-liquid assets take much longer to convert into cash and may involve high fees.
- Real estate: Homes and investment properties can take months to sell, and the final price may be lower if you need to sell quickly.
- Business equity: The value of a business depends on many factors. Selling a business or shares of a business can take time and often requires expert valuation.
- Retirement accounts: Although you can sell investments inside these accounts, you cannot withdraw the funds without penalties until you reach retirement age. For this reason, they are not considered liquid.
How to Increase Your Liquid Net Worth
Pay down short-term liabilities
Eliminating high interest debt increases your liquid net worth immediately. Paying weekly instead of monthly or adding extra payments can accelerate your progress.
Lower your expenses
Reducing recurring spending frees up more cash that can be saved or invested. Use a budget or expense tracker to identify subscriptions or habits that can be reduced. The more cash you retain, the higher your liquid net worth becomes.
Increase your investment contributions
Investing more in liquid assets such as stocks and bonds will grow your liquid net worth over time through compound interest. You can also diversify into areas like precious metals or other easily tradable assets.
Reduce non-liquid assets if necessary
In extreme situations, converting illiquid assets into more accessible forms can increase liquidity. However, this should be a last resort since it may reduce overall net worth.
Increase your income
Earning more money through career advancement, salary negotiation, or side hustles helps you save and invest more. Higher income accelerates debt payoff and strengthens your liquid net worth.
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