Finances are a multifaceted, fickle subject for many. This is especially true given recent times. Not only did the economy experience a major downturn, but many people are finding themselves sitting at home these days relying on their savings thanks to COVID-19. Whatever situation you find yourself in, there is no denying that your finances can cut across various aspects of your life and sometimes sneak up on you and knock the literal breath out of you.
Take liquid net worth, for example. Sure, liquid net worth isn’t something that garners as much attention as net worth, but there is no denying that liquid net worth is important, plays a major role, and can impact your overall financial situation.
What Exactly Is Liquid Net Worth?
If you are like most individuals, you are probably thinking, what in the world is liquid net worth? This is a fair assessment and a fair question, as it is a term that rarely comes up.
Liquid net worth is a financial concept that represents the amount of your net asset worth. Sounds kind of complicated, right? It’s really not. When you put it in simple terms, liquid net worth is everything that you own that you can sell for cash.
If you owned everything that you owned today, how much cash would you be left with? That is your liquid net worth.
What Is A Liquid Asset?
If you want to calculate liquid net worth, you are going to need to know all your liquid assets. Liquid assets are basically the items that you have on hand that you can turn into cash. That being said, it is also important to consider other assets that might or might not be liquid assets.
For instance, your home and cars. While you might own your home and cars outright, do you think you could sell them quickly? And, if you did so how much of a loss would you take? If you are paying a mortgage does that mean that your home could still be considered a liquid asset? All viable questions and ones that you will need to answer before you know your liquid net worth.
Identifying Your Liquid Assets
To start out, you should set a couple of requirements for your liquid assets.
First, you should make sure that they are assets that you own. The cash must be available for these items and they should not be held as a security for a loan or other type of debt. So, if you are paying a mortgage or borrowed money on your car, you would not consider these items liquid assets.
Secondly, a liquid asset should be an item that can be realistically turned into cash within a reasonable timeframe, usually anywhere from a couple of days to 6 months.
Lastly, you should only consider assets that you can sell without taking a major loss. It is always realistic to expect a bit of a loss, but if you will suffer a huge loss, you’ll want to move on.
Once you know all of these assets, you’ll be able to realistically sit down and calculate your liquid net worth. If you sold all of these items, how much money would they bring in?
The number that you end up with is your liquid net worth. And, this is a number that will help you prepare for those what-if situations in life.