If you've been tracking your net worth, you may have a false sense of security.
While it makes you feel good to see a substantial net worth, which is a good thing, most of your money may be tied up in your house and retirement funds.
Those aren't going to help you in the event of an emergency when you need quick access to cash.
That is where liquid net worth comes into play. It shows you how much cash you have access to in the short term to address financial emergencies or allow you to live a life of financial freedom.
For a better understanding of your financial health, you should track your liquid net worth.
We'll get more into the details of how to calculate your liquid net worth in a bit, but first, let's take a look at the differences between net worth and liquid net worth.
Disclosure: This post may contain affiliate links. If you make a purchase through the links, I may receive a commission at no cost to you. Please read my disclaimer for further details.
What is Net Worth
Net worth is the value of your assets minus your liabilities. In other words, it is the cash value of what you own minus what you owe.
Net Worth = Assets – Liabilities
It is pretty straightforward to calculate your net worth. This can be done by using a spreadsheet or a free tool like Personal Capital.
And while net worth doesn't indicate how well you can handle unplanned financial situations, it is still an important indicator of your overall finances.
Even with a low liquid net worth, having a high net worth can indicate you have a home that is paid off or that you are well prepared for retirement (or both!).
And if you're curious, according to this article on NerdWallet, the average net worth in the United States is $692,100. However, the median net worth is $97,300.
What Counts in Net Worth?
When you calculate net worth, you include your cash, cash holding accounts, investment accounts (including retirement), home value, and other high-valued belongings (vehicles, jewelry, fine art, etc.) as your assets.
You don't include your other personal items because of their low resale value. Most people don't include the other high-valued belongings mentioned above either because their resale value is harder to determine and track.
What is Liquid Net Worth
Liquid net worth is the value of your liquid assets minus your liabilities. It typically excludes assets that are more challenging to liquidate, like your home or 401(k), but we'll discuss those items in more detail later.
Liquid Net Worth = Liquid Assets – Liabilities
Because liquid net worth only considers liquid assets, it shows you how well prepared you are to handle financial emergencies. Having quick access to cash helps you overcome challenging times without creating additional debt.
So, to understand how to calculate liquid net worth, let's look at the differences between liquid and non-liquid assets. And while liquid assets are pretty straightforward when considering liquid net worth, non-liquid assets fall into a gray area of whether they should be included or not.
Liquid assets are assets that are in the form of cash or can be readily converted to cash. These include:
- Checking and savings accounts
- Money market accounts
- Certificates of deposit (CDs)
- Treasury bills and bonds
- Mutual Funds
- Exchange-Traded Funds (ETFs)
Cash and bank accounts
Bank accounts and cash are the most liquid assets because you don't have to sell anything or pay any penalties to access those funds.
Cashing out a CD before it matures will result in the payment of a penalty. Typically this penalty is a number of days or months worth of interest. So, you won't be losing any of the money you paid to purchase the CD, and you can get your cash out quickly.
Investments outside of retirement accounts are considered liquid; however, be aware that it can take a few days to access your funds.
Additionally, when selling investments, you are responsible for taxes on any gains you have made, as well as any brokerage fees.
If the investments are over a year old when you sell them, you'll owe long-term capital gains tax. Long-term capital gains are taxed at 0%, 15%, or 20% based on your taxable income level and your filing status.
If the investments are less than a year old when you sell them, you'll be taxed at the ordinary income tax rate for your income bracket.
When calculating your liquid net worth, you need to consider these additional costs (i.e., you need to reduce your investment contribution to your liquid net worth by the amount you will be taxed and any commission fees).
Non-liquid assets are assets that aren't readily converted to cash or carry more substantial penalties when converting to cash. These include:
- Your house
- Retirement accounts (401(k), IRAs, etc.)
- Vehicles (cars, boats, RVs, etc.)
- Other high-value possessions (jewelry, fine art, furniture, collectibles)
These items are more complicated when the need arises to liquidate them. While I list them as non-liquid, that isn't entirely accurate. Anything you own can be liquidated. It is just a matter of how quickly and at what cost that can be done.
Owning a home is an excellent asset and can be one of your net worth's most significant contributors. However, because of the complicated process of selling a home, it isn't a very liquid asset.
First, it can take weeks or even months to find a buyer for your house. And once you find a buyer, there is typically a due-diligence period and time to finalize all of the required paperwork. So you can't count on getting money from selling your home anytime quickly.
Second, to move your home quickly, you may have to sell it for less than it is worth. This could cost you tens of thousands of dollars. Additionally, you'll typically pay 6% in realtor fees and, while the buyer usually pays closing costs, you may need to pay those as well to sell your home quickly.
Finally, if you had a mortgage, you'll need to pay that off with your sale proceeds. Not to mention you'll need money for wherever you plan on living afterward.
One other option with a home is the ability to tap into the equity for cash. However, there are several requirements to qualify for a home equity loan, which may be challenging to meet if you are struggling financially. Additionally, you'd be adding to the liability portion of the net worth equation, reducing your net worth.
While retirement accounts can be liquidated in a relatively short period of time, there is typically more to the process than when you sell regular investments. And there are severe tax and penalty considerations when withdrawing money from a retirement account.
To receive funds from a retirement account, you'll have to fill out paperwork to process a distribution. Different plans will have different processes and timelines, but once the distribution is approved, you'll usually receive your money in a few days.
If you have reached retirement age, your retirement accounts can be considered liquid assets.
For Traditional 401(k)s and Traditional IRAs, unless you qualify for, and your plan allows a hardship withdrawal, you'll be required to pay a 10% penalty on distributions before you reach the age of 59½. This penalty will be on top of the taxes owed. And for pre-tax plans, you'll be required to pay taxes on the total distribution (your contributions and earnings).
For after-tax Roth plans, you can withdraw your contributions at any time without penalty or tax because you already paid taxes on that portion. However, the same rules as pre-tax plans apply for the withdrawal of earnings from a Roth IRA or Roth 401(k).
While withdrawing any money from your retirement accounts should be used as a last resort, before considering a 401(k) withdrawal, you may want to consider a loan instead to access cash. For plans that allow loans, you can take a loan of $10,000 or 50% of the account balance, whichever is greater, but not more than $50,000. You have to pay these loans back within five years, or it will be considered a distribution, and you may owe the 10% penalty and taxes on the outstanding balance.
Like selling your home, if you need to sell a car for quick cash, you will likely have to price it below its value to sell it fast. And if you still owe money on a loan for the vehicle, you'll have to pay that off as well.
Because of those factors, many people don't include vehicles when calculating liquid net worth.
You may choose to include other higher-valued items (jewelry, collectibles, furniture, etc.) when calculating your liquid net worth.
However, determining the value of these items can be challenging, and the amount that you'll get in cash if you need to sell them quickly can be much less. So, unless you feel you can get a significant amount of money for these items, I recommend excluding them from any net worth calculations.
How to Calculate Liquid Net Worth
The basic calculation of liquid net worth is your liquid assets minus your liabilities.
However, while most people would say that liquid net worth is limited to cash you can access quickly, I'm going to provide three different calculations that apply to different situations:
- Day-to-day liquid net worth
- Short-term liquid net worth
- Emergency liquid net worth
Dividing it into three different categories isn't a standard way to look at liquid net worth. However, I believe it is helpful for your overall financial planning.
It is simple to perform these calculations using a spreadsheet. List all of your sources of cash in one column, and list all of your liabilities in another column. Add the columns up and determine the difference between them. When you list the sources of cash, you may want to categorize them as immediate, short-term, and emergency to make the below determinations easier.
And again, using a tool like Personal Capital can track your net worth over time and makes pulling the information below a more straightforward process. And it's FREE to use!
Day-to-Day Liquid Net Worth
Your day-to-day liquid net worth shows you how much cash you can access today. It shows how much you have to address immediate living expenses and urgent emergencies.
Day-to-day liquid net worth is essentially the money you have for your day-to-day cash flow and is the basis for creating a budget. And while I'm calling it day-to-day, it is ideal to look at it either on a paycheck-to-paycheck basis or a month-to-month basis.
It can also be an indicator of how you are (or are not) making your money work for you.
Other than money for an emergency fund, your day-to-day liquid net worth shouldn't be very high. I know – this idea may not seem to make much sense, but let me explain.
Day-to-day liquid net worth is determined by the amount of immediate cash you have available (cash and money in checking, savings, and money market accounts) and subtracting the expenses for the time period that money is expected to cover.
Day-to-Day Liquid Net Worth = Cash On Hand – Expenses The Cash Needs to Cover
Sounds like budgeting, right? Well, it kind of is. However, it also shows you if you could be investing more money.
For example, let's say your monthly expenses are around $3,000. So your day-to-day liquid net worth would be your cash on hand minus $3,000. If you target six months for your emergency fund savings, your day-to-day liquid net worth should be around $21,000 ($3,000 monthly expenses + $3,000 x 6).
If your day-to-day liquid net worth is $40,000, it is an indication you may be keeping too much cash on hand. While it is good that you've saved that additional money, you could be investing almost $20,000 to achieve higher potential returns. And if your day-to-day liquid net worth is near $10,000, it is an indication you are behind on your emergency fund savings.
As an aside, I want to point out that you can keep your emergency fund money in investments as well. Just ensure you have another way to pay for any emergency expenses, like a credit card that you can pay off in full after you liquidate some of your investments.
If you have a solid budget, you likely don't need to worry about day-to-day liquid net worth. But if you don't track your money carefully, it may be a good exercise to figure it out.
Short-Term Liquid Net Worth
Short-term liquid net worth is the one you want to pay the most attention to. It is an excellent indicator of your true financial health. Additionally, it is what you need to focus on if you are looking to achieve financial freedom.
Short-term liquid net worth is what most people are talking about when they refer to liquid net worth. And the higher it is, the better. However, if you have a home and owe a lot on your mortgage or have other significant debts (student loans, credit card debt, etc.), it could actually be negative.
Calculating short-term liquid net worth is still pretty straightforward:
Short-Term Liquid Net Worth = Liquid Assets – Liabilities
The liquid assets include cash, checking accounts, savings accounts, money market accounts, CDs, and other non-retirement investments. And don't forget to account for any taxes, brokerage fees, or other penalties and fees required to access your money. You can use a reduction factor, or a discount, of 20% to cover those expenses on your investments.
Because you don't include your home or retirement savings, it is possible to have a high net worth and a low, or even negative, liquid net worth.
Having a short-term liquid net worth of $0 is actually not that bad if you've struggled with debt in the past. Essentially, it means that you have cash on hand or in non-retirement savings/investments to cover all of your liabilities.
That is a good place to be. Of course, anything that raises it even higher makes it an even better place to be.
And that is where you can start understanding how close you may be to financial freedom. If your short-term liquid net worth is high enough to cover your living expenses until you reach retirement (or beyond), without additional income from work, you have achieved financial freedom and can retire anytime!
The one caveat to that thinking is that you need to ensure you consider other potential future expenses (vacations, kid's college, weddings, etc.) and goals you may have. However, if you have that much short-term liquid net worth, it will make taking care of those things much more manageable.
Emergency Liquid Net Worth
Finally, that leaves us with emergency liquid net worth. This should only be considered for true financial emergencies. Considering selling your home or withdrawing retirement savings early should be actions taken as a last resort.
But it is always an excellent idea to estimate what cash resources you have access to because those emergencies don't typically come with a warning.
Calculating your emergency liquid net worth is similar to calculating your short-term liquid net worth, except you'll include your home (and other valuable belongings if desired) and retirement savings.
Emergency Liquid Net Worth = Liquid Assets + Liquidated Non-Liquid Assets – Liabilities
Estimating Your Home's Liquidation Value
When calculating how much cash you can get from selling your home, you can use a site like Zillow to estimate it's value.
When using Zillow, you'll see a Zestimate, as well as a Zestimate range. These numbers can vary quite a bit, and if you need to sell your home fast, a good starting point is the bottom of the Zestimate range. And you may need to go lower than that. Additionally, remember you need to account for realtor fees and potentially closing costs as well.
So to be on the safe side, consider using a reduction factor, or a discount, of 25% for liquidating your home.
Estimating Your Car's Liquidation Value
Similar to finding your home's value, you can find your car's value using Kelley Blue Book. You'll enter details about your vehicle (year, make, model) and then choose additional features it may have before being shown a trade-in or private purchase price.
Additionally, you can get a cash offer for your vehicle. Several other sites that will purchase your car as well, like Carvana and AutoNation. Or you can take it to a CarMax if you have one nearby. The price you'll be offered is going to be lower than what you could sell it yourself for, but you don't know how long it could take.
If you have time to sell it, you can use the estimate for the private purchase price and knock it down 10-20% to move it quicker.
Either way, you should use a reduction factor, or a discount, of at least 20% off the private purchase price if you are going to include your car in your emergency liquid net worth calculation.
Estimating Your Retirement Account's Liquidation Value
Other than withdrawing contributions from a Roth account, you'll owe taxes on withdrawals from an IRA or 401(k). Additionally, if you don't meet a hardship exception, you'll owe an additional 10% penalty if you are under 59½.
So, you should apply a reduction factor, or a discount, of 30% to your retirement savings to account for the penalty and taxes.
Example Liquid Net Worth Calculation
With all of that in mind, here is an example of how to calculate short-term and emergency liquid net worth. Day-to-day liquid net worth is simply your immediate cash on hand minus your expenses in the period the money is expected to cover.
As you can see in this example, even though the net worth is over $200,000, the short-term liquid net worth is actually negative. And the emergency liquid net worth is almost $100,000 less than the net worth due to the money paid on taxes, fees, and penalties.
How to Increase Your Liquid Net Worth
While there may be other ways to increase your liquid net worth, these are the main ways to improve your financial situation.
1. Reduce Expenses
By reducing your regular expenses, you can save more money, which raises your liquid net worth. You, like most people (myself included), regularly overspend on various things without realizing it. By tracking your expenses, you can identify and reduce or eliminate this spending.
Additionally, using a tool like Trim is an excellent way to cut expenses. Trim will analyze your spending, identify recurring expenses, and even help you cancel those you no longer use. Additionally, it can help negotiate lower cable, internet, and even medical bills for you.
2. Reduce Liabilities
Regardless of how you calculate your liquid net worth, the one factor that typically remains the same is the liabilities.
Working to reduce debt has a direct impact on increasing your liquid net worth and becoming more financially stable. Whether you make additional payments on your mortgage or pay off all of your credit cards, reducing debt is critical to achieving financial freedom.
3. Increase Savings
Saving money is important, and the more you can save, the more you'll increase your liquid net worth.
You should always be looking for opportunities to save more money. You can use cashback shopping apps, cut down on eating out, and be more mindful when making purchases. All of these can add up to significant savings over time.
4. Increase Your Income
Finally, increasing your income can directly impact your liquid net worth if you use the additional money to pay off debt or save more.
You can ask for a raise, start a side hustle, or create passive income streams. There are always additional ways to make more money. You just have to be willing to ask or work for it.
Frequently Asked Questions About Liquid Net Worth
What qualifies as a liquid asset?
To be truly liquid, an asset needs to be cash or readily converted to cash without losing significant value. Cash on hand, money in bank accounts, and non-retirement investments are examples of liquid assets.
Is a house a liquid asset?
No, a house is not a liquid asset. Because of the amount of time it takes to find a seller and complete the transaction, a home is not easily liquidated. Additionally, it is not considered a liquid asset because of the impact selling fees and commissions have on the value.
Is a car a liquid asset?
No, a car is not a liquid asset. Like a house, it can take a significant amount of time to find someone to buy your car. Additionally, the more motivated you are to sell it, the lower the asking price will have to be. So you'll receive less money than the actual value.
Is a savings account a liquid asset?
Yes, a savings account is a liquid asset. A savings account is easily accessible to withdraw your money, and you don't lose any value when taking a withdrawal from savings.
Do stocks count as liquid net worth?
Yes, stocks count towards liquid net worth, provided they are not part of a retirement account. While it can take a few days to receive your money after selling stocks, the money is readily available, and, other than taxes and commissions, there is little impact on the cash value.
Is a 401(k) a liquid asset?
No, a 401(k) is not a liquid asset unless you have reached retirement age. While you can cash out a 401(k), it can take some time, depending on your plan, to process a distribution. Additionally, the impact on the cash value is significant due to taxes and penalties.
Is a bank account a liquid asset?
Yes, a bank account is a liquid asset. Money in bank accounts (checking, savings, money market) is readily accessible and loses no value when withdrawn.
Is a credit card a liquid asset?
No, a credit card is not a liquid asset. While it provides you with available credit to make purchases, those purchases immediately become a liability. However, a credit card could give you the ability to pay for an emergency expense by allowing you more time to liquidate other liquid assets to pay for it.
Is gold a liquid asset?
Sort of, gold and other precious metals can be exchanged for cash somewhat readily, so it would technically make them liquid. Having gold is similar to other investments, and you can find the spot price of gold online to know its value.
What is the most liquid form of money?
The most liquid form of money is cold, hard cash. Money in your checking and savings accounts is the next best thing in terms of liquidity.
How much cash should you keep liquid?
How much cash you should keep liquid depends on how you are keeping it. You should keep at least six months worth of living expenses in cash accessible bank accounts. This provides enough money to deal with short-term emergencies or job loss. It is also good to keep a few hundred dollars available in cash at home to be prepared for natural or civil emergencies that could impact withdrawing money from a bank.
Can liquid net worth be negative?
Yes, liquid net worth can be negative, even with a significant net worth. Home value and retirement savings usually make up a large portion of your net worth. Since those are typically excluded when calculating liquid net worth, you can have a negative liquid net worth if you have a mortgage, credit card debt, or other debts like student or personal loans.
Conclusion on Liquid Net Worth
Liquid net worth can be a complicated subject because there aren't hard and fast rules about what is included in its calculation. However, it is an important number to understand because it provides a more accurate picture of your financial well-being than net worth. And it can help you understand if you are independently wealthy.
Hopefully, this article helped you better understand the differences between net worth and liquid net worth, along with the different factors that need to be considered when calculating liquid net worth.
And don't forget to try out Personal Capital if you haven't already. It is a free tool that tracks your net worth and includes several other free financial tools.