Calculating your net worth and liquid net worth can provide two valuable snapshots of your financial health. Both look at what you currently own minus what you currently owe, and both can help measure how you’re progressing toward your goals.
While calculating net worth offers a more panoramic view—your total assets minus your total liabilities — liquid net worth narrows the focus to just the amount you own in liquid assets minus your total liabilities.
While net worth often gets all the attention, a person’s liquid net worth can sometimes be an even more revealing number, since it determines how much cash you actually have access to, or could come up with quickly if you needed to.
Here’s how to determine your liquid net worth, and what you can do if it’s not as high as you’d like it to be.
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What’s the Difference Between Net Worth and Liquid Net Worth?
Your total net worth includes all of your assets (what you own) and liabilities (what you owe). When you determine your net worth, you add up all your assets, including non-liquid assets, such as your house, car, and retirement accounts, and then subtract all of your liabilities. The resulting number is your total net worth.
Your liquid net worth is the amount of money you have in cash or cash equivalents (assets that can be easily converted into cash) after you’ve deducted all of your liabilities.
It’s very similar to net worth, except that it doesn’t account for non-liquid assets such as real estate or retirement accounts.
Your total net worth gives you a picture of your overall financial strength and balance sheet, while liquid net worth shows how much money you have available that is quickly accessible in case of emergency or other financial hardship.
Both measures of net worth can give you a useful snapshot of your financial wellness, since they consider both assets and debts. Looking at your assets without considering your debts can give you a false picture of your financial situation.
Knowing and tracking these numbers can also tell you if you are moving in the right or wrong financial direction. If your net worth or liquid net worth is in negative territory or the numbers are declining over time, it can be a sign you need to make some changes and/or may want to put off making a major purchase such as a home or a car.
Why Liquid Net Worth Matters
Your liquid net worth is a measure of your ability to weather a financial storm. Imagine you need money for something important—a major home or car repair, a trip to the ER, or starting a new business.
You need it now… or, at least, within the next few weeks or months. Where are you going to get the money?
You might not want to look at selling things like your home, your car, your retirement savings, your baseball card collection, or Grandma’s wedding ring unless it’s absolutely necessary.
Those kinds of assets can be difficult to convert to cash in a hurry—and there could be consequences if you did decide to go that route.
Instead, it may be easier to tap your more liquid assets, such as cash from a checking, savings, or money market account, or cash equivalents, like stocks and bonds, mutual funds, or money market funds.
Liquid net worth is often considered a true measure of how financially stable you are because it tells you what you can rely on to cover expenses. In addition, your liquid net worth acts as an overall emergency fund.
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Calculating Your Liquid Net Worth
The difference in calculating net worth and liquid net worth is understanding which of your financial assets are liquid assets.
Liquid assets are cash and assets that could be converted to cash quickly. The following are considered liquid assets.
• Cash: This includes the money that is in your wallet, as well as the cash you have in any savings, checking, and money market accounts.
• Stocks: Any equity in a brokerage account, such as stocks, index funds, mutual funds, and ETFs, is considered a liquid asset. While you might have to pay taxes on any capital gains if you sell equities to convert to cash, you could liquidate these assets fairly quickly.
• Bonds: Like equities, any bonds or bond funds are also liquid assets. Again, you may have to pay taxes on your profits when you sell, but the translation is relatively quick.
Non-liquid assets include anything that cannot be converted to cash quickly or for their full value, such as:
• Retirement accounts, such as 401(k)s and IRAs.
• A house or other real estate holding (which could take a while to sell and the actual sales price is not known).
• Cars (while you may be able to liquidate a car relatively quickly, cars generally don’t hold their original value).
To calculate your liquid net worth, you can list all of your liquid assets—the cash and cash equivalents you could easily and quickly get your hands on if you need money.
The next step is to list your current liabilities, including credit card debt, mortgage balance, student loan balance, unsecured loans, medical debt, and any other debt.
You can then subtract your liabilities from your liquid assets. The result is your liquid net worth.
Improving Liquid Net Worth
If your liquid net worth is too low to cover at least three- to six-months worth of living expenses or, worse, is in negative territory, you may want to take some steps to bolster this number. Here are some strategies that can help boost liquid net worth.
Building an Emergency Fund
If you don’t already have a solid contingency fund set aside in a liquid account, you may want to start building one. Having enough cash on hand to cover three- to six-months worth of expenses can be a great place to start building your liquid net worth.
An emergency fund can help keep you from getting behind on your bills and running up high interest credit card debt in the event of an unexpected expense, job loss, or reduction in work hours.
Reducing Expenses
For every dollar you save each month, you are potentially increasing your liquid net worth by that amount. One way to cut spending is to take a close look at your monthly expenses and to then try to find places where you may be able to cut back, such as getting rid of a streaming subscription or two, lowering your food bills, or shopping around for a better deal on home and car insurance.
Lowering High-Interest Debt
Debts add to your liabilities and therefore lower your liquid net worth. Expensive debt also increases your monthly expenses in the form of interest. This gives you less money to put in the bank each month, making it harder to build your liquid net worth.
If you’re carrying credit card debt, you may want to start a debt reduction plan (such as the “debt snowball” or “debt avalanche” method) to get it paid down faster.
Increasing Investments
Investing money in the market for long-term savings goals, such as a child’s education, can increase your liquid net worth thanks to the magic of compounding interest (when the interest you earn on your money also earns interest).
While there is risk involved, you’ll have more time to ride out the ups and downs of the securities markets when saving for the longer term.
The Takeaway
Liquid net worth is the amount of money you have in cash or cash equivalents after you’ve deducted your liabilities from your liquid assets.
Liquid net worth is similar to net worth, except that it doesn’t account for non-liquid assets, such as real estate or retirement accounts.
Your liquid net worth can be a valuable measure of your financial health and stability because it shows how prepared you are to handle a change in plans, an unexpected expense, or a true emergency.
One easy way to boost your liquid net worth is to start building an emergency fund. If you’re looking for a good place to start saving, you may want to consider opening a high interest bank account like SoFi Checking and Savings®.
SoFi Checking and Savings allows you to separate your savings from your spending while earning competitive interest on all your money.
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