Why Liquid Net Worth Matters

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.

A Realistic Snapshot Of Your Financial Condition

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. 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.

Asset Rich, Cash Poor Can Be Uncomfortable

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. 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.

Land and antiques are assets we have owned and enjoyed. However, you can’t count on those assets to pay for a costly emergency. When I think about my mistakes, those purchases stand as significant regrets. You sleep easier with access to liquid assets. Having available liquidity is essential, especially during recessions.

What Is Net Worth?

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. The formula:

 Net Worth =  Total Assets less Total Liabilities

Using an Excel spreadsheet with different assets/liabilities is an excellent way for putting all of your categories in one place that can be periodically updated. You should do it on at least a quarterly basis. However, reviewing your monthly net worth is better if you follow your monthly budgeting.

Track your investments monthly or quarterly. Any way you can keep on top of your net worth to build the amount will work. Try putting it on a spreadsheet first.

Knowing Your Net Worth

Net worth is a crucial benchmark and report card at a particular time. By knowing your net worth, you can make changes to improve your financial health.

  • It will allow you to set near-term and long-term goals.
  • Track its changes for better money management.
  • Highlight your liquid asset balances.
  • It helps you to get a loan for a house, car, college tuition, or new business.
  • Pay down high-cost debt.
  • Refinance your mortgage loans.
  • Encourage you to save and invest more.
  • Buy your own home rather than pay high rent.
  • It is a great road map to building your wealth.


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. Although net worth provides a view of your current financial condition, it doesn’t differentiate the assets that can provide you with liquidity speedily and efficiently.

When facing a medical crisis or an opportunity to invest in financial securities or a business, getting rapid access to your money is optimum. You can sell your car quickly, but likely for less than the estimated value. Understanding what assets are more liquid means they can be readily converted into cash with little or no loss in value. The formula:

Liquid Net Assets = Liquid Assets Less Total Liabilities

You can either remove non-liquid assets from your total assets or discount their values from their appraisals. Additionally, it would be best to recognize that tapping certain assets too early, such as retirement accounts, could result in paying penalties and taxes. More than that, you lose momentum when you withdraw assets benefiting from compounding growth.

Knowing Liquid Net Worth:

  1. Understand the differences between your net worth and liquid net worth. The latter 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, and fees.

How To Calculate Your Liquid Net Worth

Liquid Assets:

  • Cash
  • Cash-Equivalent Securities
  • Brokerage/Investment Accounts

The most liquid assets are cash, cash-equivalent (or money market) securities, and investment or brokerage accounts. These are either already in money or are those financial or monetary assets that can quickly 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. These days, banks are paying higher interest rates on your deposits. 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 six months or a year, you may need to pay a minor prepayment penalty, but this is reasonably accessible money. Separately, you need an emergency fund readily accessible in liquid securities like money markets earmarked for unforeseen expenses.

Brokerage/Investment Accounts

All financial securities can be bought or sold in your brokerage account. Typically, they are stocks, bonds, REITs, mutual funds, and ETFs in these taxable investment accounts. While these accounts are liquid in three business days, you pay taxes on price appreciation based on the time you held the security. Holding the securities for over one year is taxed at a lower 15% capital gains rate. Otherwise, you pay taxes at the same rate as ordinary income.

Less Liquid Assets

The cash value of your life insurance policy is relatively liquid, but you may have to absorb small fees. Depending on the company, it can take more time (e.g., 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.

Retirement Accounts

When withdrawing money from your retirement accounts before you turn  59.5 years old,  you will likely be hit with a 10% penalty and immediate payment of ordinary taxes, losing the deferred benefit on that amount. Generally, if you withdraw early from a 401K plan or IRA account, you will pay taxes at your marginal tax rate. The marginal tax rate is the tax rate paid on the dollar of earnings (e.g., 22%-24%).  On the other hand, Roth IRAs are treated differently. For those accounts, so long as you have had this account for five years or more, you may withdraw contributions you made to your Roth IRA anytime, tax-free and without penalty.

The Secure 2.0 Act provided exceptions for hardship withdrawals that qualify for specific emergency expenses, like medical bills for you and your spouse and dependents, educational costs, eviction avoidance, funeral expenses, and emergency repairs for your home.

While you may have access to your retirement savings, these are not liquid assets. You should not dip into your retirement accounts unless needed as a last resort. By withdrawing these funds, you lose the compound benefit of this money for your future when you are less likely to earn money at your job.

If you are including retirement accounts in your liquid net worth, you should discount your retirement balances by 25% to be conservative.

529 College Savings Accounts

Like retirement accounts, withdrawal of money saved in a 529 college savings plan may be subject to a 10% penalty, and you will have to pay ordinary taxes. The exception to this rule for 529 savings is withdrawals made for qualified education expenses such as tuition, fees, books, computers, and related costs.

If you include 529 accounts into the liquid net worth, use a similar discount of 25% off the account balance.

Other  Assets

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

If you own the primary home you live in, this may be your largest asset. While you may see your home as an investment, it is not a liquid asset like the financial securities you invest in. You cannot count on liquidating real property for quick conversion to cash. Using Zillow Zestimate and other sources, you must figure out how your area’s real estate market is faring.

Selling your home is a complex process that can take several months or more. An appraisal value is not necessarily your sales price, which is often lower. Also, to complete your sale, you are responsible for fees and costs, including broker fees of 5%-6% on the sales price, closing costs of 1%-2%, and attorney costs.

Most likely, you are carrying a mortgage that is picked up in total liabilities. Upon the sale of your home, you will pay off your mortgage in full from the proceeds of your home, reducing your liabilities.

Your primary home as an asset should be discounted by about 25%-30% off its estimated value for liquidity purposes.

Other Real Estate

Besides your primary home, you may own other real estate types, including vacation or second home, timeshares, land, real estate syndication, and rental property. Having just sold a plot of land, I can tell you that we took a 30%-35% hit from our cost basis in an ugly market after putting it on the market over a year ago.

Use current conservative market values for real estate. Appraised values may not reflect actual sales or liquidated values. You should not be inflating your liquid or net worth unrealistically.

You would need to approximate the value of your home, cooperative, condominium, cars, boats, and other large items. Look at Zillow Zestimate, Redfin, Chase Home Estimator, or real estate websites for your zip code to approximate real estate values.

Your Business(es)

If you own businesses outside your primary income, it is tricky to calculate a value, let alone consider it a liquid asset. While you may want to include a discounted multiple of annual revenues in your net worth statement, retaining it for liquid net worth doesn’t make sense unless you have the business appraised and a ready buyer.

Personal Property Is Tricky To Value

Unless you have a meaningful fleet of cars and boats, you should not add these to your assets for your net worth.  These assets depreciate too fast and sell too slowly to add pretty much to your liquid net worth. You can look at Kelly Blue Book, Edmunds, or AutoTrader for cars if you have that fleet. Similarly, for boats, you can consult Boat Trader.

What Else Goes Into Total Assets?

Art, rare books, rugs, and antiques may be a large part of the net worth of wealthy households handed down to the next generation. Unless they are highly desirable or rare, these assets tend to be wildly low liquidated values to count on if you need money in a pinch. Musical instruments have value but are tough to peg, and their sales are less predictable to raise capital.

This category has a lot of sentimentalities, but its value may be tough to ascertain. Don’t count these assets unless you work with an estate professional with knowledge and a terrific network to help sell the items.

List all your Liabilities By Current Balances

Liabilities reflect what you owe in various loans.


  • 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 don’t include the value of the businesses.
  • Personal loans
  • Credit card account balances (you should break these out individually).

Total Liabilities

As mentioned earlier, the formula is relatively straightforward:

Total  Liquid Assets minus Total Liabilities = Your Liquid Net Worth

Depending on the composition of your assets, your liquid net worth may be in bad shape (i.e., negative) when you are conservatively discounting large assets like your home but including the entire mortgage balance. You must consider whether you need to adjust your investment strategies, spend less, save more, and make sure you have money for emergencies.


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 and reduce your spending, and grow your savings.

An ample emergency fund of 6-12 months for unexpected events like a lost job. Invest this fund in an FDIC-insured money market account as long as it is readily accessible when you need money.

Put more of your money into investment assets like stocks that can expand wealth rather than in personal possessions.

Add to your retirement accounts the contribution limit. Avoid withdrawing money from these accounts, which trigger penalties and taxes. The same goes for 529 plans.

Increase your salary or add a side gig to boost your income.

Consider buying recently used cars rather than luxury fast-depreciating vehicles.

Choose to invest based on your risk appetite and where you are in your life cycle.

Where Should I Invest My Money To Maximize My Liquid Net Worth

Stocks are riskier but generate higher returns than keeping your savings in bank accounts at low returns.

According to Bankrate, the best annual percentage yields (APY) from less traditional online banks are increasing to 4-5% in September 2023, benefiting from the Fed hiking interest rates to bring down high inflation. Some banks may require a minimum balance and have monthly fees of up to $15.

The younger you are, the more able you are to ride out the more significant risk found in stock investing, with the benefits of compounding effects.

Homeownership remains a worthwhile investment, but current mortgage rates are over 7%.

Decreasing your loans or debt liabilities will increase your liquid net worth.

Your Mortgage Loan Deserves Your Careful Attention

Mortgage rates rose to 7% level due to higher interest rates as the Fed raised its interest rates to reduce inflation. At some point in late 2024 or 2025, the Fed will likely cut rates, and you may be able to consider refinancing your mortgage if you carry more than 5% loan rates.

Target carefully what you borrow, for how long, and at what rate. Look at taking out a 15-year mortgage loan versus a 30-year mortgage loan. While your monthly payments for the 15-year loan will be higher, total borrowing costs will be lower.

A mortgage loan is expensive, but home prices have historically kept pace with inflation.

Lower Your Debt Where Possible

Pay off your credit card debt in full. It’s likely your highest-cost debt, so use extra savings, bonus, or tax refund to lower this amount. Otherwise, slow your spending.

Pay off your student debt as soon as you are able.

Final Thoughts

Using your liquid net worth by refining your assets for liquidation 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. When facing an immediate need for cash, you don’t want to withdraw retirement funds designed for your financial future.