Liquid Net Worth: What it is And How is it Determined?

In today’s world, the term “net worth” is commonly used. When we come across an article about wealthy people, we frequently see the term net worth. When you subtract all of your liabilities from your total assets, you get your net worth.

So, in case you read Amazon founder Jeff Bezos has a net worth of $214 Billion, it is the value by which his total assets are exceeding his total liabilities. Although reading someone’s net worth does seem like some shiny object, the real gold would be determining the liquid net worth. 

What is Liquid Net Worth?

Liquid net worth is the cash left in your hands after total obligations are subtracted from liquid assets, just like net wealth. This means that non-liquid assets like real estate are not taken into account. As a result, liquid net worth is an key aspect in determining a person’s financial health, and it is more accessible due to the ease with which cash may be converted.

How to Calculate Liquid Net Worth

Liquid Net Worth equals Liquid Assets minus Liquid Liabilities.

The amount of your entire liabilities is subtracted from the sum of your total liquid assets to determine your liquid net worth. Because liquid assets have a liquidity discount associated to them, you must factor in the discount factor when computing liquid net value.

To better understand how to calculate net worth, consider the following example. To make things easier, we’ll calculate using a conservative discount rate. Based on your calculations, you can choose any appropriate discount rate.

Assets Total Value of Assets Discount Rate Total Liquid Value
Cash $40,000 0% $40,000
Investments $200,000 20% $180,000
401k $100,000 30% $70,000
Total $340,000 $290,000
Credit Cards $45,000 0% $45,000
Student Loans $35,000 0% $35,000
Liquid Net Worth $210,000

In the case above, the liquid net worth is $210,000 after subtracting total liabilities from liquid assets.

**A 401(k) plan is a type of retirement savings account that allows employees to put a percentage of their paycheck into long-term investments.

Also Read: Types of Inflation

How to Grow Liquid Net Worth?

Because modern society has more wants than needs, many people are in debt and have very little cash on hand. This is especially true if you’ve just begun your employment and have a lot of student debt to pay off, or if you’re going through a lifestyle transition that necessitates loan repayment. In any case, you may discover that your liquid net worth isn’t what you expected after calculating it! The following are some suggestions for increasing your liquid net worth:

1. Increasing Your Earnings

The best way to improve your financial health is by earning more money. Many people are stuck in low-paying jobs or have a single income source that prevents them from improving their financial position. You can improve your earnings by trying to negotiate for higher pay, building a side hustle, or even switching to a better-paying job. Having more money also means that you will be able to repay your debts easily and also save to invest your money while building your wealth.

2. Repay Short-term Debt

To preserve a healthy financial balance in your life, it is critical to settle your debt as soon as feasible. However, because short-term loans have high interest rates, it is critical to repay them as soon as possible. Paying down short-term debt at a faster rate also means you’ll have to pay a lower interest rate. This will aid in the repayment of your debts, thereby increasing your net worth.

Must Read: What is the Role of an Estate Planning Attorney?

3. Spend Less Invest More

Many people run out of money because they waste too much of their money on frivolous items. To ensure that you do not spend more than you require, you must keep a cap on your overall expenses. You can also invest your money in order to build wealth and increase your liquid net worth. Saving money to pay off debts or invest will naturally increase your net worth in the long run.

Final Thoughts

To determine one’s financial situation, one should maintain track of their liquid net worth. Liquid net worth provides you with a complete financial picture and assists you in making better financial decisions.

Frequently Asked Questions

I need to take a loan to buy a house. Will this affect my liquid net worth?

Any type of debt has an effect on liquid net worth. Yet, if you have sufficient liquid assets to repay the debt, you may still be in good financial shape.

Is it necessary to calculate liquid net worth?

Liquid net worth is an key measure of financial health, and assessing it will help you understand your total financial health.

I have a negative liquid net worth. Is that a bad thing?

Having a negative net worth is a poor thing. Yet, if you are in the early phases of your profession or life, you can save, invest, and pay down debt to have a positive net worth later in life.

Why is 401k considered while calculating liquid net worth?

Because a 401k is a retirement benefit that is considered a liquid asset, it is taken into account when determining liquid net worth.

How can investments help me increase my liquid net worth?

Many individuals regard investments to be a secondary source of income, and as a result, they can benefit your financial situation by boosting your liquid net worth.

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