Liquid Net Worth: How To Track Your Financial Freedom

Understanding how much liquid net worth you have on hand is a huge part of starting your journey towards FIRE. However, it’s not exactly as cut and dry as adding up all the money in your bank accounts.

You need to consider things like your liquid net worth and your total net worth and make sure you understand the difference.

This will get you well on your way to knowing what you’re worth, and you can use that as a jumping-off point to calculate your FIRE number and figure out how many years away you are.

What Is Liquidity?

The best place to start is with the term liquidity. This is just a fancy term that represents how fast an asset can turn into cash. Also, the more liquid the asset is, the better it retains its cash value when it is converted.

Cash is very liquid because you can access it immediately, in an account like CIT Bank. Cash also doesn’t lose any market value like nonliquid assets can.

Stocks and bonds are mostly liquid because you can access them within a few days. However, when you sell them, there could be slight fees that cut into how much you actually get when you take money out of the accounts.

Cars, houses, and expensive jewelry are considered illiquid assets and have low liquidity because there is a long, tedious process that takes them from material items to cash in hand. And there is usually a hefty fee involved when selling them.

What Is Liquid Net Worth?

The short answer is that liquid net worth is the portion of your finances that can easily be converted into cash. Things like cash, stocks, and bonds are all considered liquid because you can fairly easily access them. Some people also add their illiquid assets at an appropriate depreciated amount when calculating contingency plans.

Regardless of how you’re calculating liquid net worth, this is an important number because it lets you know how easily you’ll be able to survive a severe financial crisis. Like losing your job, or a pandemic. Calculating this number gives you an idea of how financially secure you are at any given moment.

How Do I Calculate My Liquid Net Worth?

To calculate liquid net worth, list out all the assets you have. Liquid assets include anything accumulated in your checking account, saving account, any mutual funds, retirement accounts, money market account, brokerage account or anything that can easily be converted into cash.

Then estimate how much it would take to move each asset into cash.

For example, cash retains 100 percent of its liquid value because it’s already in your hand or in your bank account.

But something like stocks, ETFs or would lose a bit of value when you sell them. This is because you would need to pay both the fees for selling them and any capital gains taxes. Capital gains tax is the tax on investments held for more than one year.

Retirement funds are similar. But keep in mind that if you’re younger than 59 ½ you’ll have to pay a 10% early withdrawal penalty on top of all the taxes and fees.

You want to make sure that when you add the amounts together, you take account of all of the penalties, fees, and if you’ll also owe taxes. Your total liquid net worth calculation is how much cash in hand once you’ve sold off your financiassets, so don’t be surprised if the number is 15 to 20 percent smaller than the straight values of each account.

Check out Empower – A free online tool that shows you what your average net worth looks like over time. It also helps you analyze your investments!

What Things Count Towards Liquid Net Worth?

Generally, people only count easily liquidated assets in their final liquid net worth plans. Things like cash or cash equivalents, investment accounts, and in a pinch, retirement savings accounts. But those aren’t the only things you should consider when creating your liquid net worth plan. There are a lot of illiquid assets that you can liquidate to create some extra cash flow if you need it.

There are certain assets that you might want to consider even though they’re not traditionally considered a liquid asset. It’s helpful to have a financial plan in place that considers different levels of liquidity depending on what straits you’ve found yourself in. In your plan, you might want to consider the following as assets you can liquidate.

• Real estate
• Business interests
• Personal businesses
• Furnishings, trinkets and personal possessions
• Annuities

While none of them are considered liquid assets, since you have to spend a considerable amount of time and effort to convert them back into cash, they’re definitely worth taking into account as part of a financial contingency plan.

What Is Total Net Worth?

It’s important to note that liquid net worth is different from total net worth because they take different things into account. Your total net worth, in short, is the difference between all of your assets and current liabilities. It’s really just what you own as an individual and what you owe to other entities.

An asset is something that holds value, like stocks, bonds, retirement accounts, or a mortgage. And a liability is something that you owe on like a mortgage, student loan, car note, or credit card debt.

Your total net worth is simply the difference between the two.

How Do I Calculate My Total Net Worth?

While knowing your total net worth may be daunting, especially if you have a large amount of debt, It’s very easy to calculate your networth.

Get out a sheet of paper (or excel spreadsheet) and in one column, write down all of your assets and their value. Make sure that you’re considering all your assets, not just easily liquidated ones. So this means your house, car, and any expensive belongings you might have. Add them up. In another column, write down all your total liabilities and add them up.

Then take the two totals and plug them into this net worth basics formula:

Assets – Liabilities = Net Worth

Assets are anything that you own. This includes stocks, bonds, the real estate market (your personal property or rentals) and anything also considered liquid. Liabilities are any money owed to another, including short term debt and long-term debt. This can include anything from credit card balances, student loan debt, outstanding mortgage balance, etc.

And that’s your total net worth.

Liquid Net Worth vs. Total Net Worth: What’s The Difference?

The difference between your total net worth and your liquid net worth can be a lot since your total net worth is different from your liquid net worth. While liquid net worth is the amount of cash and cash equivalents you would have on hand if you liquidated all of your assets, your total net worth is your gross assets minus your liabilities. It doesn’t take into account any taxes, fees, or penalties you might pay from selling off assets.

If you have little debt, your total worth is generally more than your liquid net worth since it doesn’t take into account any of the costs of liquidating assets. However, if you have quite a bit of debt, your liquid net worth might seem like more, since it’s how much cash on hand you would have if you sold everything and doesn’t take into account any outstanding debts.

Knowing both numbers is essential to maintaining good financial health, and knowing how you compare to others.

Tips to Grow Your Net Worth

Increasing your net worth has many benefits. For example, it improves your financial health, may aid in your ability to retire early, and provides you with peace of mind. It might feel difficult to increase your net worth, but with these tips, it’s possible.

Use a Financial Advisor

Anyone can use a financial advisor. A financial professional can provide you with an objective view of your portfolios and provide investment advice on changes you can make. An unbiased third party isn’t emotionally invested in your net worth, so they can tell you objectively what you should do to increase your liquid net worth, including investing in the stock market.

You may receive suggestions for investment strategies for securities you didn’t know about or find other ways to diversify your portfolio to keep it growing. A financial professional also keeps you accountable, ensuring you reach your short and long-term goals by making good financial decisions.

Budgeting

If you don’t have a budget, now’s the time to start one. It’s an eye-opening way to see where your money goes and helps you make more informed decisions regarding your finances.

For example, you might not realize how much money you waste on subscriptions or unnecessary bills when instead, the money could go to your savings or brokerage accounts.

Budgeting tells your money where it must go and ensures your discretionary spending is in line with what you can afford while meeting your financial goals.

Trim Expenses

Trimming expenses may feel impossible, especially in today’s high inflationary period, but there are ways you can cut back.

First, consider your largest expenses and determine if you can reduce them. For example, can you refinance your mortgage loan to lower your payment? Next, look at your car loans. Can you pay them off early or refinance them?

After hitting the big bills, look at your everyday spending. Consider cutting cable, using coupons when grocery shopping, looking for cheaper insurance, and canceling unnecessary subscriptions and memberships.

Reduce Debt

High-interest debt is an opportunity cost to increase your liquid net worth. When you pay interest charges, you ‘steal’ money from your assets. After saving an emergency fund, your first goal should be to pay off your high-interest debt and then increase your net worth.

Putting money in your investments before paying off high-interest debt usually results in a loss because no investment can outpace certain the interest certain debts like credit cards charge.

If you have lower-interest debts, such as student loans, you can split your funds between paying off the debt and increasing your net worth.

Increase Savings

When building your budget, allocate funds to your savings accounts. Of course, an emergency fund is essential, but you can increase your liquid net worth by regularly contributing to your savings account.

Consider setting up a high-yield savings account so your money earns more interest than a brick-and-mortar bank pays but allows you to have liquid assets.

Build an Emergency Fund

Liquid assets are essential to any budget. Money in savings accounts serves as an emergency fund. When something unexpected happens, you can ‘borrow’ from yourself instead of getting into credit card debt or borrowing personal loans.

Keep at least six months of expenses in your savings accounts, and keep other liquid assets just in case you have an emergency that you can’t afford so you avoid going into debt.

Emergency funds typically cover things like job loss, illness, family emergencies, and unexpected major repairs in your home or car.

Build Long-Term Investments

Long-term investments target retirement. Ideally, you should allocate 10 – 15% of your income toward your retirement accounts, but if you aren’t there yet, contribute as much as possible, increasing your contributions annually.

If your employer offers employer-match, contribute at least as much as they’ll match, and if you’re paying off credit card bills, split your money allocated for investments between paying off your debt and saving money in your retirement account.

Liquid Net Worth FAQs

Understanding what is and is not a liquid asset and what can be a little tricky. Here are answers to the most common questions asked about liquid and illiquid assets.

Is a house a liquid asset?

No. Liquid assets are assets that can be fairly easily accessed in cash. Since houses have to be sold before you can access the cash, they are not a liquid asset. You may however use the fair market value (subtracting closing costs) of any real estate sales in your normal net worth tracking.

Is a 401k a liquid asset?

Maybe. Before retirement, 401(k)s are not considered liquid assets, because the cash cannot be accessed easily. However, after you’re 59½ and can access this money easily, it becomes liquid since you can easily access that money with no penalties. If you do pull money from a 401k early, it will result in a 10% penalty.

Is an IRA a liquid asset?

Maybe. Just like a 401(k), if you’re not retirement-aged, then the account is not liquid. But after you’re retirement age, it is a liquid asset. This includes traditional and roth ira accounts. Your transaction costs effect your marginal tax rate if you create a true liquid event and withdraw from any of these accounts under the age of 59 and a half.

Are stocks a liquid asset?

Yes. Stocks are considered a liquid asset. You can sell stocks fairly quickly and with relative ease and they maintain a majority of their value when sold.

Are bonds a liquid asset?

Yes. Since you can sell bonds with relative ease and get the money in your hand fast, they are considered a liquid asset.

Is a car a liquid asset?

No. Just like a house, a car is not a liquid asset. You have to sell the care before you can access the cash. And that can be a long and time-consuming process.

Is a credit card a liquid asset?

NO! A credit card is not considered an asset at all because you don’t own the money on the card. It’s considered a liability instead, especially if you carry a balance.

Difference Between Liquid Net Worth and Regular Net Worth?

Your regular net worth number would include your liquid net worth. Your net worth however would include things that aren’t easily convertible to cash, such as your home.

What To Do With Your Liquid Net Worth Now

Now that we’ve spent some time talking about the difference between total net worth and liquid net worth, you should be able to calculate both and have a better understanding of where you are financially. These tools are a huge step towards financial independence.

It’s not always fun to stare those numbers straight in the face. But those numbers are what will help you shape your personal plans to retire. If you need help calculating these numbers consider talking to an accountant or financial advisor who can help you create a financial analysis.

Take some time today to calculate both of your net worths. Then use that number and our FIRE calculator to figure out how much more money you need to save for retirement. See how soon you could reach financial freedom today!