What Is Liquid Net Worth And Why Does It Matter?

You often hear that “cash is king.” Homes, cars and other long-term investments contribute greatly to lifestyle and financial security. However, greenbacks and coin are what actually pay the bills and allow you to purchase what you want and need. For this reason, it’s important to pay close attention to your liquid net worth.

What Is Liquid Net Worth?

The combined total of your cash and cash-equivalent assets minus your liquid liabilities is known as your liquid net worth. Simplifying that technical definition a little bit, think of liquid net worth as the combination of your cash and your assets that can be easily converted into cash.

What Are Liquid Assets?

Liquid assets are those that can be easily converted to cash on hand to satisfy debts and purchase goods and services. In addition to cash on hand, these include assets like checking, savings and money market accounts. Stocks and bonds as well as government treasury securities would also be included. The higher your liquid assets, the higher your liquid net worth.

Certain assets may or may not be liquid depending on how you hold them. For example, if you personally control your ownership in a mutual fund through a taxable brokerage account, it would be considered a liquid asset. If that same mutual fund is included as part of a 401(k) that you can’t access before retirement age without paying a tax penalty, it’s not considered liquid.

Why Liquid Net Worth Matters

Liquid net worth is an important part of the overall picture of your financial health because it measures how much of your portfolio could easily be converted to immediately spendable cash in the event of an emergency. Think about the need for medical treatment or an unexpected car repair.

Along with giving you something to fall back on in times of trouble, having higher liquid net worth gives you access to cash to take advantage of opportunities the moment they’re available. Imagine that classic Corvette you’ve had your eye on for years has finally hit the market or you’re looking to expand your pizza empire and you have the chance to buy industrial kitchen equipment.

Net Worth Vs. Liquid Net Worth

Net worth, or total net worth, includes not only your liquid net worth, but other assets that are more permanent in nature. While it would take more time to dispose of these assets for cash, they represent an important part of your overall financial picture.

While liquid net worth includes cash (on hand and in your accounts), stocks and other items that you could sell on short notice to free up funds, net worth adds the following into the picture:

• Real estate
• Retirement funds
• Vehicles
• Any longer-term investment with a penalty for cashing out early

All of these items are added to your liquid net worth when calculating total net worth.

What Is Liquid Net Worth?

The combined total of your cash and cash-equivalent assets minus your liquid liabilities is known as your liquid net worth. Simplifying that technical definition a little bit, think of liquid net worth as the combination of your cash and your assets that can be easily converted into cash.

What Are Liquid Assets?

Liquid assets are those that can be easily converted to cash on hand to satisfy debts and purchase goods and services. In addition to cash on hand, these include assets like checking, savings and money market accounts. Stocks and bonds as well as government treasury securities would also be included. The higher your liquid assets, the higher your liquid net worth.

Certain assets may or may not be liquid depending on how you hold them. For example, if you personally control your ownership in a mutual fund through a taxable brokerage account, it would be considered a liquid asset. If that same mutual fund is included as part of a 401(k) that you can’t access before retirement age without paying a tax penalty, it’s not considered liquid.

Why Liquid Net Worth Matters

Liquid net worth is an important part of the overall picture of your financial health because it measures how much of your portfolio could easily be converted to immediately spendable cash in the event of an emergency. Think about the need for medical treatment or an unexpected car repair.

Along with giving you something to fall back on in times of trouble, having higher liquid net worth gives you access to cash to take advantage of opportunities the moment they’re available. Imagine that classic Corvette you’ve had your eye on for years has finally hit the market or you’re looking to expand your pizza empire and you have the chance to buy industrial kitchen equipment.

Net Worth Vs. Liquid Net Worth

Net worth, or total net worth, includes not only your liquid net worth, but other assets that are more permanent in nature. While it would take more time to dispose of these assets for cash, they represent an important part of your overall financial picture.

While liquid net worth includes cash (on hand and in your accounts), stocks and other items that you could sell on short notice to free up funds, net worth adds the following into the picture:

• Real estate
• Retirement funds
• Vehicles
• Any longer-term investment with a penalty for cashing out early

All of these items are added to your liquid net worth when calculating total net worth.

The Bottom Line

Liquid net worth is found by subtracting your liabilities, your debt, from the cash or cash equivalents you have. For example, you would include checking and savings accounts, personal brokerage accounts and any personal property of value that you would be willing to sell if it meant improving your cash position. It’s not overall net worth, which includes real estate, cars and retirement accounts.

To increase your liquid net worth, some of the big things you can do include cutting down on expenses, taking on a side hustle and paying off debt. Before you do any of that though, it’s a good idea to analyze your budget. The Rocket Money^℠ app can help you gain a better understanding of your full financial picture.