Are you wondering what your liquid net worth is? In this post we are going to look at what is liquid net worth, importance of liquid net worth, how to increase your liquid net worth and some of the best liquid net worth calculators in 2021.
On this website, we create a lot of informative posts on how to make money, best side-gigs to make money and even net worth of celebrities and influencers who have made money online so that you too can start some side business (online) and make some extra money.
I recently helped a client of mine generate $1000 in income from his YouTube channel that was not making any money and even you can do the same.
Earlier, I had co-founded a video company and raised $2 million in funding and then got fired from the company I started. I had done lot of testing and research on how to monetize YouTube and now I use the same skills to help other YouTubers.
You can read my full story here if you are interested.
If you are interested in the whole concept of making money online, you can check out some of my other posts including 10 Easy Ways to Earn Money Online without Investment, How to Earn Money from YouTube, how to earn money from Facebook and how to start a blog and make money.
I have also written a post on 9 Best & Free Portfolio Analyzer with Features & Benefits , you can check that post if it interests you.
The ultimate freedom is having passive income sources that create money without taking away a significant amount of your time.
Imagine what you could do if you have a couple of passive income sources that were generating around $3000 in a month–you would no longer be confined to a job, you can move to any city/ town you want and you can work when you want.
Most importantly, such income sources will increase your net worth over a period of time.
Net worth can be defined as the total wealth of an individual, company, or business, which takes into account all financial assets and liabilities.
Net worth is not to be confused with liquid net worth as both are different.
What is Liquid Net Worth
To calculate your liquid net worth, you can subtract all your liabilities from your liquid assets that you currently hold.
Calculating your liquid net worth is important because it shows how much assets you have that you can liquidate in case a need arises.
Liquid Net Worth = your net worth in cash or net worth that can be converted to cash with some surety.
To keep things simple, we will also look at some frequently asked questions about liquid net worth.
Frequently asked questions about liquid net worth
Is a house a liquid asset?
Short answer No.
A house cannot be fully considered as a liquid asset because there are several factors you need to consider if you want to liquidate your home.
- The current real estate market
- Taxes you need to pay
- Brokerages you need to pay if sale happens thought a real estate broker
If you really want to add your house under your liquid assets, you can take a percentage value of the house (considering all of the above factors).
Is a 401k a liquid asset?
Short answer No.
This is because withdrawing a 401k or any other type of retirement funds before the age of 59.5 will produce a penalty of 10%.
If you only have a 401k, you also need to consider taxes (22-24% for most income groups)
However, do note that you can still liquidate your 401k, after all it is your money.
With the right financial planning expert, you can use Roth IRA Conversion to avoid the 10% penalty as part of early retirement but ideally you should not consider your complete 401k as a liquid asset.
Is a Roth IRA a liquid asset?
Short Answer No.
Withdrawal of any investment gains before age 59.5 means that you have to pay 10% early withdrawal penalties and taxes on gains.
If your Roth IRA value is comparatively on the lower side, you can still liquidate without paying a heavy penalty or taxes but this again depends on individual cases.
Are stocks and bonds liquid assets?
If required you could sell your stocks and bonds and have money in around 3 business days.
However, if you have been holding your financial assets for less than a year it will be taxed.
If you had your stocks and bonds for more than a year, you qualify for a 15% reduction in tax (long term capital gains tax).
When you are including stocks and bonds in your liquid net worth, be sure to add your taxes, brokerage percentage etc.
What does it mean if I have a negative liquid net worth?
It means you have debt and this is not very uncommon. Many people start off with negative liquid net worth and the first step towards financial freedom is to pay off debt.
Net Worth vs Liquid Net Worth
As you would have guessed, net worth combines all your assets whereas liquid net worth only takes into account the assets you can liquidate immediately.
Many people tend to overestimate their total net worth and this is one of the reasons to understand your liquid net worth as this gives a better idea about your current financial status.
For example, let us consider that you have assets worth $400,000 (your home, car, stocks, bonds etc.) and you have around $200,000 in liabilities (mortgage, educational loans etc.)
Now, let us consider that you need some urgent cash for some medical emergency or to invest in any new business.
In most cases, you might not be able to liquidate your home, car etc. quickly and even if you do, you might not get the actual market price.
Also, when you liquidate an asset like a home or stock you will have to pay transaction fees and applicable taxes. Suddenly, your net worth has reduced.
Importance of Liquid Net Worth
Now, that you have understood what is liquid net worth, let us look at the importance of liquid net worth.
To have liquid net worth means to have some sort of financial security.
For example, You drive a car that is worth $35,000. YOu also have savings worth $35,000 in your savings account. So, your net worth can be estimated to be $70,000.
If you were to have a medical emergency (god forbid) or you needed cash of $25,000 immediately, then your savings account will be of greater use to you than your car.
Depending on the place you live and the condition of your car, you might or might not be able to sell the car for $35,000 so your liquid net worth of $35,000 is invaluable.
Do note, liquid net worth will always be lower than your total net worth because these are assets that can be liquidated.
For Creating Emergency Fund
Ever since I started working, I started saving money to create an emergency fund.
This is funds that I never touch unless something very urgent or serious comes about.
Emergency funds are funds that can ideally keep your life going without completely breaking down.
How much money you should have in your emergency fund will depend on your lifestyle and dependants and because I am single and don’t have many commitments, my emergency funds are lower than many people of my age.
Your liquid net worth will give you an idea of how much money you should have saved in your emergency funds in case of an emergency.
How to Calculate Liquid Net Worth
Calculating your liquid net worth is fairly easy.
All you have to do is take stock of your liquid assets and deduct your liquid liabilities.
Common liquid assets can include
- Cash in hand
- Stocks, bonds, mutual funds
- Retirement accounts (check the calculation above)
- Car (check the calculation above)
- Jewelry, art, collectibles (depends on the value of your collection)
Some examples of liabilities include:
- Student loan debt
- Car loans
- Personal loans
- Remaining Mortgage payment
- Credit card debt
- Other types of debt.
You can create a simple spreadsheet to add all of your liquid assets and in the next column add all your liabilities.
You can run a simple formula to subtract the two and you have your liquid net worth.
Liquid Net Worth Calculator
You can also use this online tool to calculate your net worth.
Jeff Bezos Liquid Net Worth
I have worked in many startups and I got tired of the “valuation” games that startups & investors play. In my experience, most startups that raise capital are neither solving a problem or bringing any innovation.
They just repackage old ideas, add some tech stack on top of it and raise funding in the hope that someday in the future they will be profitable. Jeff Bezos & Amazon are different.
Jeff started Amazon, saw it through the dot com bubble burst and made Amazon one of the most-valued and successful companies in the world.
It’s no wonder that Jeff Bezos is one of the richest men in the world worth an approximate $182 billion.
Jeff Bezos liquid net worth will be hard to calculate as his total worth is around $182 billion and people who live in such financial strata do not necessarily liquidate a lot of their assets.
In 2019, there was a report that Jeff Bezos had liquidated his Amazon stock worth $1.8 billion. This was his largest cash withdrawal from Amazon stock and he would have netted around $1.4 billion after taxes.
It was also reported that these funds might be used as capital for his space research company, Blue Origin.
How To Improve Your Liquid Net Worth
Now that you have understood the importance of liquid net worth, here some ways to improve your current liquid net worth.
First on the list of how to improve your liquid net worth is to understand your current liabilities and then reduce them. Liabilities means debt or someone you own money to.
Liabilities affect you in two ways:
- It reduces your monthly cash flow
- It causes you to lose money in interests
The first step towards improving your liquid net worth is to pay off debt as fast as possible and restructure your current debt to reduce interests.
As someone who started my career from making $100 in a month, to making over $6000 in side income in addition to my full time job, I can assure you that sometimes we forget our actual expenses.
When cash is coming in every month, we do not necessarily take stock to think where we are spending and end up incurring a lot of expenses.
For example, I have 10 watches in my watch collection that I never use and should have probably invested this money more wisely.
That being said, now I am reducing my expenses and I’m learning to calculate wealth in terms of free time.
Reducing your expenses means that you have more cash in hand and this automatically improves your liquid net worth.
Have a Personal Financial Audit Every Year
All companies are required to have an audit every financial year and I think it is a good idea to have a personal financial audit every year.
I maintain a Google sheet about my monthly expenses and this includes all rent, food, random expenses and indulgences.
It might sound like a lot of work, but it is actually simple.
Download the Google spreadsheet app, create a sheet with date, expense, description of expense and source of spend.
Everytime you make a purchase or spend money on something, just add information in these 4 columns and at the end of the month you have a trail of where your money went.
I was shocked to find how much money I was spending on food and alcohol during the last couple of months and now I try to cook at home and reduce drinking.
Having a personal financial audit will help you understand how much money you are spending in cash which could actually be used to increase your liquid net worth.
Start A Side Business
Next on the list of tips to improve your liquid net worth is to start a side business.
When I was working at my full time job, I had a side business that was generating me more than double my salary.
Needless, to say I was never bothered about getting fired and I never used to suck up to my bosses–my colleagues warned me about the consequences but they didn’t know I was financially free. You can read my full story here.
Anything that makes a couple of hundred dollars on the side is a worthwhile pursuit because sometimes little cents can add up and open a lot of opportunities.
Having a side business also means that your liquid net worth increases because it is automatically improving your cash flow.
If you have a company registered, your side business can take care of some of your personal expenses by marking it as business expenses.
Start Investing Early
Last tip on how to increase your liquid net worth is to invest early.
If you are new to investment and you really don’t know where to invest money, just start a fixed deposit with your bank and consider this as an investment.
Time really does fly and if you start investing early, even your small investments can grow over a period of time and your liquid net worth also increases because you have ready access to funds if needed.
Why Liquid Net Worth Matters
Liquid net worth is not something that someone will ask you or information required to get a bank loan.
However, a good understanding of your liquid net worth gives an indication on how your life is doing, financially.
Recently, I quit my full time job to work for myself (on this site and few other projects) and the reason I could take such a decision even when the Pandemic hit was because I had a clear understanding of my liquid net worth.
I had enough savings to last at least a year and I had long term savings to even survive for an additional few years.
My liquid net worth was an assurance that I could take risks and have the freedom to decide the course of my life.
I know many of my friends who work in jobs they hate because they do not know any other way to earn an income.
I have also started calculating my net worth in terms of time (or years) I can live without having to work at a job.
For me, this is the only reason liquid net worth matters.
Hope you had a good time reading this post, do check out my other posts on how to earn some extra income online.