Liquid net worth is the money that we have in cash or the cash which is equivalent to the liabilities which get deducted from our liquid assets. There is a helpful comparison of our assets to that of our liabilities when we have short and long-term financial goals. This value of comparison can be ultimately determined by net worth which allows us to known whether we should reduce the annual spending of a month and also helps to guide whether to set up a saving account of retirement or adjusting the withholdings of our tax. People engage with the profession of finance provide investment advice, planning on finances, and various financial arena. The net worth can be divided into two primary groups’ i.e.
- Total net worth
- Liquid net worth
The liquid and the non-liquid assets which we have gets affected by the total net worth. Liquid assets are the assets of any individual or a company that can be converted into cash and non-liquid assets are the assets of the individual or a company like land, real estate, etc which cannot be easily converted into cash. Now it clearly says to add up the value of all our monetary items which includes the bank accounts, property holdings, etc.
We need to then subtract the total value of our liabilities from the above sum. When the sum of our liabilities are more than that of our assets we will have a negative net worth and when the monetary value of our assets is more than that of our liabilities we have a positive net worth. The financial debt of an individual be it any kind of loan, the balance of credit card is known as the liabilities.
How Liquid Net Worth Is Important In Our Finance
The formula remains very basic i.e. simply to subtract our liabilities from our assets in which the asset should be in liquid form so that it can be counted. Including this, some other factors are important while its calculation. All other types of assets are not always equally accessible while they can be accessible at the time of emergency i.e. when there is a need for cash. The total net worth can be more in comparison to the liquid net worth of an individual as it only considers the liquid assets while on the other hand total net worth comprises of all the assets of an individual
Keeping track and constantly calculating the liquid net worth would provide several benefits to the individual. Our financial security can be easily evaluated by keeping a regular track. There is a motivation of creating an emergency fund automatically once keeping track of the liquid net worth. It is dependent upon what we have right now which acts as a far better ability to react to financial shocks and opportunities which are created through finance. It matters a lot as it reflects the liquidity of the asset of an individual. When we are talking about it, we are talking about the gross value of our assets.
Factors Affecting the Liquid Net Worth
Factors vary from individual to individual as it depends upon the composition of the asset holding of an individual. For example, the individual’s liquid net worth will be lower if the individual’s assets are more in real estate or retirement savings than cash.
The factors of liquidation are unique to each asset class.
This factor includes cash and equivalents of cash
- Cash upon hand
- Savings account
- Market account of money
- Certificate of deposit
The liquidation of money never reduces as there is no fees or market value consideration. Exception in case of Certificate of Deposit as we need to pay penalty in case of liquefying the certificate before term.
Plans of Retirement
This personal asset becomes the most misunderstood liquid net worth in comparison to others. The reason for this misunderstanding is the income tax. Retirement plans are not tax-free but they may differ in tax. If we need to liquidate our plan we need to pay tax on the amount which will be withdrawn by us. There are charges needed for liquefying the amount. Some commissions are paid upon the asset selling which is held in the plan.
About Real Estate
Among all the liquefying assets real estate is the most complex and the complicated one. It takes even weeks after weeks to sell a house in the market. The price of the property depends upon how quickly the individual wants to sell. Besides the market factors, there are costs which are needed in doing transaction. Apart from this, other costs act as a closing cost.
Liquid Net worth Calculator
For determining the liquid net worth we need to take the total sum of our liability and then subtract it from the total sum of our liquid assets. During the calculation, the liquidity discount on liquid assets should be taken into consideration.
Liquid Net worth = Individual Liquid assets – Individual Liabilities
Individual liquid assets include
- Cash holdings
- Savings account
- Mutual fund, stocks, etc.
- Retirement plans
Individual Liabilities include
- Credit card balance
- Mortgage balance
- All other debt
Calculating the liquid net worth acts as an eye-opener for an individual and also acts as an interesting exercise for achieving the freedom of financial activities and help the individual to build up the individual’s assets.
The Total net worth Vs. The Liquid Net Worth
The liquid net worth is the amount of money that an individual has in hand or cash equivalent. The net worth is a bit similar but the difference lies in that it doesn’t take into account the non-liquid assets like real estate and retirement plans.
Although both the liquid and non-liquid asset affects the total net worth, the total net worth is higher than the liquid net worth as it takes costs needed during the transaction of converting non-liquid assets into liquid cash.
The Liquid Net Worth of Mine
As above discussed the liquid assets can be said those assets which we can use at any point in time. The money which we have in our savings account is the best example as we can withdraw the amount of money when needed. Some other investment like stocks also falls in the same category as we can sell to earn the money. Our debts are also needed to be considered as all liabilities are been equally counted but the assets are not.
Liquid net worth is the actual thing that provides financial freedom by covering all the expenses. How financially stable we are can be measured through it. It works as an emergency fund which is required by every individual during any kind of emergency.