Why Liquid Net Worth Matters

“Liquidity is a good proxy for relative net worth. You can’t lie about cash, stocks, and bond values". Mark Cuban

Liquid net worth is what really matters. It is a far more realistic reflection of your financial condition should you face an immediate need for money such as a medical crisis or a business opportunity.

What Is Net Worth? Your net worth is your personal balance sheet that provides a snapshot of your financial position at that time. Net worth is all that you own less than all that you owe.

What Is Liquid Net Worth? Liquid net worth yields all of the benefits you get from knowing your net worth but having liquidity gives you the flexibility to pursue opportunities or face challenges quickly.

Your Liquid Net Worth:

1. Understand the differences between your net worth and liquid net worth. Liquid net worth is what you need to count on for immediate funds. 2. Liquidity varies among our assets which have different growth rates. Money market accounts are liquid but typically have lower returns than stock investments long term. 3. Consider costs involved in the transactions such as penalties, taxes, fees, and such

How To Calculate Your Liquid Net Worth?

Total  Liquid Assets minus Total Liabilities = Your Liquid Net Worth

Liquid Assets:

The most liquid assets are cash, cash-equivalent (or money market) securities, and investment or brokerage accounts. These are either already in cash or are those financial or monetary assets that can easily turn into cash with little or no loss in value.

Cash is the best form of liquidity but of course, doesn’t grow unless it is invested.  This category broadly consists of cash on hand, prepaid cards, savings accounts, checking accounts, money market accounts, certificates of deposit (CD), savings bonds, and emergency funds. If your CDs are in a fixed term like 6 months or a year, you may need to pay a small prepayment penalty but this is fairly accessible money.

Brokerage/Investment Accounts

All types of financial securities can be bought or sold in your brokerage account. Typically, they are stocks, bonds, REITs, mutual funds, and ETFs that are in these taxable investment accounts. While these accounts are liquid in a matter of three business days, you do pay taxes on price appreciation based on the time you held the security.

Less Liquid Assets

The cash value of your life insurance policy is fairly liquid but you may have to absorb small fees. Depending on the company, it can take more time (eg. 10-20 days) than access to financial securities. On the other hand, access to pensions and investments in real estate such as multifamily homes are less liquid.

Tangible assets

These assets are real and personal property that reflects your lifestyle and is harder to liquidate for funds. -Your Primary Home - Other Real Estate - Your Business(es)

List all your Liabilities By Current Balances

Mortgages – Your mortgage loan balance is probably your largest liability. – The home equity loan balance. – Separate mortgage loan balances for the other real estate property (listed above in assets)

Other Loans – Student loans at the current balance. – Loans associated with the business(es) even though you aren’t including the value of the businesses. – Personal loans – Credit card account balances (you should break these out individually).

How Can You Build Up Your Liquid Net Worth: Make Good Trade-Offs Track changes in your liquid net worth statement as early as possible to make sure you are making progress towards your goals. Track your spending, review for areas you can reduce, and produce savings

While net worth is a more common benchmark, refining your assets for liquidation purposes gives you a more realistic picture. Tracking liquid net worth helps you to understand your ability to deal with a crisis or an unexpected opportunity.

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