Why Liquid Net Worth Matters

Understanding your net worth and how to calculate it is essential for measuring your financial health at a particular point in time. It is simply the difference between assets and liabilities and remains a helpful benchmark. However, it doesn’t consider the liquid nature of your assets.

Liquid net worth better reflects liquidity available to you for emergencies and opportunities. For example, stocks and bonds can be more easily liquidated in financial markets than a boat you own.

Financial assets tend to be more liquid than other assets as they can quickly and easily convert into cash. Other assets like your house or car take time and negotiation to sell if you need money.

Liquid net worth is what 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.

A Realistic Snapshot Of Your Financial Condition

While liabilities remain the same for both calculations, your liquid assets have more significance when unforeseen events occur. Those assets readily available as cash with little or no loss of value provide liquidity. Having liquid money offers financial security for disasters and opportunities alike.

To a great degree, when you need to take money out to pay for an unforeseen event, would it be easier to take $15,000 out of your savings account or sell your land? It depends if you have $15,000 in the bank.

Asset Rich, Cash Poor Can Be Uncomfortable

The expression “asset rich, cash poor” comes to mind. Often, people have economic assets like land or other financial interests but cannot quickly liquidate them for money.

Your net worth is your balance sheet that provides a snapshot of your current financial position. Net worth is all that you own less than all that you owe.

What Is Net Worth?

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