Do you know how much you're worth? Let’s dig into the concept of liquid net worth and uncover why it's a game-changer for your financial well-being.
What is liquid net worth?
Liquid net worth is the cash you can quickly access after deducting any debts. Unlike total net worth, which includes all assets like your house, liquid net worth only considers assets that can be converted into cash swiftly.
Why is knowing your liquid net worth necessary?
In short, it’s a quick barometer for how well you can handle financial risk or pitfalls. It’s always important to know how much money you have at your fingertips if you need it. If your car blows up or your pipes burst, you need money and fast. Liquid net worth is your go-to resource. It also helps when making crucial financial decisions, such as how much to invest or how long you could survive if you lost your job.
How to calculate your liquid net worth
It’s all about knowing what counts and what doesn’t. Here’s how you do it:
Add up the value of all your easily convertible assets. This includes cash and equivalents (like checking and savings accounts), marketable securities (stocks, bonds, mutual funds), and short-term investments (certificates of deposit and money market accounts). Things that can be converted into cash quickly and easily.
Next, subtract any liabilities due within the next 12 months. Include credit card debt, personal loans, auto loans, and student loans.
The figure you get is your liquid net worth.
Frequently asked questions about liquid net worth
Q: What's the difference between net worth and liquid net worth?
A: Net worth includes all your assets, while liquid net worth only includes those that can be quickly converted into cash.
Q: How do I increase my liquid net worth?
A: Pay off debts, save more, invest wisely, and manage your expenses.
Q: Why is liquid net worth important?
A: It's a measure of your financial health and resilience in the face of potential risk. It's what you can fall back on in case of emergencies or unexpected expenses.
Q: Can I consider my retirement account as part of my liquid net worth?
A: Retirement accounts are usually not considered liquid since withdrawing from them before retirement may incur penalties.
Q: Is the value of my jewelry included in the liquid net worth?
A: Only if you can quickly sell it for cash at or near equivalent to its retail worth. Typically, physical assets like jewelry, antiques, real estate, and other physical things are considered “illiquid” – not part of liquid assets.
Q: Does liquid net worth include credit card points or air miles?
A: No, these are not usually included because they can't be converted directly into cash.
Q: What types of assets are considered non-liquid?
A: Assets like real estate, vehicles, and certain types of investments that can't be quickly sold and converted to cash are non-liquid.
Q: Does my mortgage affect my liquid net worth?
A: Yes, your mortgage is considered a liability and should be subtracted from your liquid assets when calculating liquid net worth.
Q: Can my liquid net worth go negative?
A: Yes, if your liabilities exceed your liquid assets, you could have a negative liquid net worth.
Q: Is having a large liquid net worth always good?
A: While it's beneficial for emergencies, consistently having too much cash might also mean you're not taking advantage of enough investment opportunities for higher returns.
Q: How often should I calculate my liquid net worth?
A: It's a good practice to calculate it regularly - annually, for example - or even quarterly to monitor your financial health.
Q: If I have a high liquid net worth, does that mean I am wealthy?
A: Not necessarily. Wealth is determined by various factors, including total net worth, not just liquid net worth.
Q: How does my liquid net worth affect my borrowing capacity?
A: Lenders may look at your liquid net worth to assess your ability to repay loans, especially for larger amounts.
Q: What's the quickest way to increase my liquid net worth?
A: Reducing liabilities, increasing savings, and smart investing can help increase your liquid net worth.
Q: Does a higher income always result in a higher liquid net worth?
A: Higher income can potentially lead to a higher liquid net worth, but not if the money is being spent rather than saved or invested.
Q: Does my student loan impact my liquid net worth?
A: Yes, student loans are considered liabilities and would reduce your liquid net worth.
Q: Are stocks and bonds considered liquid assets?
A: Mostly, yes, because they can be sold and converted to cash relatively quickly.
Q: Can increasing my liquid net worth help in retirement planning?
A: Having a greater liquid net worth can provide more financial security and flexibility in retirement planning.
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