Ever wondered what your liquid net worth is?
You hear this person’s net worth is this and that and wondered if you can calculate your own net worth as well?
This article will guide you through all you need to know about personal liquid net worth. I will also show you how to track your own liquid net worth over time.
Next time you hear Warren Buffet and Bill gates have increased their liquid net worth, or general net worth in that case, you will know what it means.
Net worth definition
Your net worth is the monetary value of your assets (what you own) minus liabilities (what you are to pay other people).
For example, you own a house through a mortgage. The house is valued at $500,000. And, you have paid a total of $300,000 so far and remain with a $200,000 mortgage balance. Your asset is the house valued at $500,000 and your liability is the mortgage balance.
Your net worth, therefore –if the house was the only asset you owned, is $500,000 less the $200,000 mortgage balance which will stand at $300,000.
Liquid net worth definition
Liquid net worth is the monetary value of the assets you have that can be converted to money easily, subtract your debts.
Your liquid net worth will consist mostly of wealth you can convert to money in an instant.
In our example of a house above, you will need to look for a buyer, an attorney to process the papers and many more. It thus, falls outside the liquid net worth category.
What are the common things that readily qualify as being liquid?
- Your money in the checking and savings account
- Treasury bonds
- Company stock
- Your precious metals like gold and diamonds
- Your high-end jewellery
… and many others.
Just think of an asset that can be converted into its money equivalent at an instant.
How to calculate liquid net worth
Here are the steps to calculate your liquid net worth.
Step 1: Calculate the monetary value of all liquid assets you own.
This includes the money you have. Money in your savings account. And, money in your checking account.
Also, the value of all other liquid assets like treasury bonds, company stock and gold.
Step 2: calculate all your debts.
Ensure you include mortgage, student loan, credit card loans, car loans and other miscellaneous loans.
Step 3: Get the difference between the monetary value of all your liquid assets and debts.
The value you get is your liquid net worth.
Here is an example:
Let’s say you have savings worth $10,000, $5,000 in your checking account and Treasury bond valued at $100,000.
You also have a car loan of $5,000, yet to pay student loan worth $30,000 and have a $20,000 mortgage.
Your assets will be your savings, money in checking accounts and Treasury bond. This totals to $115,000.
On the other hand, your debt will include a car loan, student loan and a mortgage totalling to $55,000.
Based on this, your liquid net worth is $60,000.
How to calculate your overall net worth
You always hear in the news that someone’s net worth increased or decreased by a certain margin.
The net worth in question here is often the overall net worth and not the liquid net worth.
So, which one is a better measure of your financial health?
Experts argue that overall net worth is a wholesome better representation of how much one is worth. It captures all assets owned by an entity, unlike the liquid net worth composition.
Unlike the overall net worth, liquid net worth only concentrates on the real cash at hand. What can be converted readily to hard cash when need be.
Calculating the overall net worth is easier than calculating liquid net worth.
Simply, add all the assets you own and subtract all the liabilities (debt you owe). The final figure you get defines your overall net worth.
However, you have to keep into account all aspects that contribute to someone net worth.
- The cash at hand and in the bank or its equivalents
- Your retirement investments
- The direct investments under your name
- All taxable brokerage investments you are part of
- All the assets under your ownership like car houses…etc.
Example: How to calculate overall net worth
Assume this reflects your financial position.
House valued at $500,000
Wife’s car valued at $100,000
Husband’s car valued at $100,000
The 401k savings worth 150,000
Company W shares worth $50,000
Other savings (the emergency fund, the sinking fund for a vacation) worth $40,000
Total assets will be a total of the above: $940,000
You also have liabilities to commit to.
The student loan balance of $30,000
Mortgage balance of $200,000
Credit card debt worth $20,000
The car loan balance of $50,000
Total liabilities will be the sum of the above debt: $300,000
Therefore, your overall net worth will be assets subtract liabilities: $640,000
There are instances when net worth falls below zero. It occurs when you borrow more than what you already have in your possession.
It does not necessarily mean you are in a position of being bankrupt. But, such scenarios puts your financial health in a precarious position.
You can easily fall into bankruptcy. You are likely to default on your financial obligation. And, you can also fall to what we call the vicious cycle of debt.
It is when you end up borrowing more to settle your current financial needs like settle matured debts. Life ends up being very stressful and hard at this point.
It is therefore very important to track your overall and liquid net worth.
It will informs you of your financial health and helps you to know if you are making any progress money wise.
You can choose to do this with a spreadsheet.
But, you can make things cheesy easy with the help of a net worth tracker.
Why your net worth is important
Sometimes, appearances can be deceiving.
You might think you are in the right financial position in life only for you to be hit by auctioneer hammer.
It is therefore very important to know your overall and liquid net worth every time. Track it in details and do not operate in the dark.
Having a house by the beach side, high-end cars and kids in good schools may seem as doing well in life. Yes, it is doing well in life.
But if you don’t keep a keen eye on your liquid net worth, it always finds a way to catch up with you.
And before you know it, the house and cars are gone and you are back to the renting life.
And therefore, knowing your net worth is important.
It informs you of your financial health over time.
A good net worth makes it easy for you to borrow cheap.
It is also part of good financial practices.
How to track your net worth
In the field of personal finance, planning is of the essence. It gets you organized; knowing what goes where and when.
The same applies to your net worth and the liquid net worth as well.
Keeping track of what is happening to your money is prudent. Or you will be letting money slip away through miscellaneous charges. And, unwanted subscriptions.
You can use personal capital (desktop and mobile app) to track your liquid net worth over time. The best part is, it is free.
With it, you can connect your bank savings accounts, emergency fund, retirement savings, credit cards…name them.
And, from a single interface, you can view graphs and charts of how your liquid net worth is changing over time.
It motivates you to want to increase your wealth and see the graphs go up. You will also know at a glance if you are doing well or not.
How to increase your liquid net worth
How do I increase my net worth?
Increasing net worth is not as hard as it may sound.
It entails activities that reduce your debt burden while increasing assets value.
1. Invest your money wisely
When investing, do it wisely.
Not all investment options are creating equall.
Always go for options that give the highest returns with minimal risks.
Also, remember to diversify your pool of investible opportunities.
If you are new to investments, you can start with acorns. It is easy for you.
With it, you can start investing in diverse investment opportunities with as low as $1 dollar.
Acorns make it so easy to go about investing with an interface easy to understand at a glance.
2. Reduce your debt obligations
If you want to increase your net worth fast, reduce your debt obligations. In the calculation of your net worth, debt is a negative factor.
If you find a way to keep it low or at zero, you will build your liquid net worth fast in a short span of time.
3. Limit your liabilities
Apart from debt, limit your liabilities. Liabilities are activities that demand money from you.
If you keep watch where your money goes, it will be easy to optimize your finances to get the most desirable results. Personal capital makes this easy for you. You can track all your finances in one interface and use the data to limit your liabilities to the minimum. The best part of it is, it is free.
4. Boost your assets
Building up your assets is one of the ways to boost your financial well-being. Assets equal wealth.
All you need is to write them down and set goals and a clear road map on how you are going to achieve them.
The more assets you have in your possession, the better it is for your financial health.
5. Track your net worth
It is important you have a tool in place to track all your assets and their value over time. You will know when you are increasing your liquid net worth or not.
Tracking your journey brings some level of accountability to your financial life.
It is never a wise idea to live in the dark.
Know where your money comes from and where it goes to and asses if you are getting the best value for your money.
Personal capital can help you with this.
6. Increase your income
Make more money than you are now. More money means you are more liquid and therefore your liquid net worth rises.
Start a home based business, claim free money opportunities and you can as well start your own profitable blog for as low as $100 per year.
Now you know much about your liquid net worth.
Do you know your liquid net worth? Do you track it the way the rich 1 percent do?
Its a good thing to know where you stand financially and if you are making any progress at all.
Personal capital automates the whole process for you. You don’t have to dig into the nitty gritty of net worth to know yours.
It is available as a mobile app (app store and playstore) and a web based version.
It is free.