Net Worth Defined
What is liquid net worth? A person’s wealth or net worth is the value of the assets they own minus the debts they owe. Assets include investment accounts, homes and other real estate, cars, boats and the shoes in the closet. For most people their debts will be a mortgage if they own a home, car loans, personal loans and credit card debt. The term liquid net worth narrows the selection of assets to those that can be turned into their cash value in a short amount of time. Liquid assets include checking and savings accounts, stock broker accounts, bonds and CDs and mutual funds.
Non-liquid assets would be your home and other real estate owned, cars, retirement plan assets and cash value life insurance. Calculate your liquid net worth by adding up your liquid assets and subtract any debts not tied to other assets like car loans and mortgages. Debts that reduce liquid net worth are credit card balances and personal loans.
Importance of Liquid Net Worth
Your liquid net worth is your freedom money. If too much of your worth is tied up in non-liquid assets, you may not have much flexibility with your financial situation. Even wealthy individuals can have problems if most of their assets are real estate, private business ownership or restricted stock options. Even Donald Trump may have to sell his jet for cash to raise some liquidity.
If at some point in the future you want to be able to start your own business, take a sabbatical, travel around the world or become a day trader, it is important to work on your liquid net worth as well as total net worth. Another part of the term liquid net worth to remember is the "net" part. Your liquid net worth is your assets you can readily turn into cash minus your debts that are not tied to a specific asset. A large amount of credit card or unsecured loan debt reduces your level of liquid net worth.
Most people work hard to earn a living and make money. If too much of your earnings go into buying things or paying off previously purchased items, you will not be able to build up your liquid net worth. It is never too early to make a concerted effort to get rid of short term debt and build up assets in savings accounts, mutual funds and your stock broker account.
Track Your Liquid Net Worth
Set up a spread sheet or keep a notebook to track the growth of your liquid net worth. In one column goes all of you liquid assets. This includes checking and savings account balances, non-IRA mutual fund values and your marketable stocks and bonds. In the second column list credit card balances and unsecured loans. Add them up and subtract the debts from the assets.
Hopefully, the number is positive. If you have a negative liquid net worth, your first goal should be to pay down the credit cards. If you are in positive liquid net worth territory, set a goal to become what the stock broker refer to as a HNWI–high net worth individual. $100,000 in liquid net worth is a good starting goal, and if you are past that level, shoot for the million bucks in freedom money.