Finance, luxury

So you say you know your net worth, but do you know your liquid net worth? Why it matters.

Most people understand the concept of calculating their net worth. It’s the total value of everything you own, minus what you owe for significant payments on a mortgage or a car. Then factor in any small amount you owe, like paying off your bar tab or that flatscreen tv you bought online on Black Friday. But what about liquid net worth? No, we aren’t talking about the value of all the bottles in your vintage wine cellar, although that might factor into the total.

First, let’s acknowledge that if you can say your net worth is above zero, you’re included among four in five Americans. The remaining one in five American households has a net worth of zero or negative amount of wealth, according to a study by the Institute for Policy Studies, a progressive think tank based in Washington, D.C.

Even if you know your net worth, financial advisers say that many people don’t know what their liquid net worth is, but finding out what that is can be important in a pinch. If an emergency comes up, you’ll want to know your liquid net worth because that’s the amount of money you can raise in a hurry. Since so many people are struggling with debt, knowing this amount can be especially important as a plan to get yourself out of financial trouble.

While nobody wants to consider the emergency situations that can come our way at any time, it’s a good idea to plan out what assets you would sell off and how much you might be able to get before such an emergency happens. After all, when we are caught up in a major difficulty in life, it’s always harder to think about what steps to take next as panic sets in.

So what is liquid net worth?

According to Surveys Say, liquid net worth is defined like this:

“Not everyone agrees on the definition of liquid net worth. In general, it is the portion of your calculated net worth figure that you can quickly turn into cash. The conflict centers on the time used to convert non-cash assets into immediately accessible money. Some financial experts define liquid net worth as the portion of your net worth that you can use as cash in 24 hours or less.”

According to Financially Simple, liquid net worth is this:

“If you had to sell everything you own today, how much cash would readily be available?”

How to calculate liquid net worth

First: If you have $15,000 in the bank, then it’s straightforward what the cash is worth. Likewise, if you have cash stored in a jar for an emergency fund, you can easily calculate the total.

From there it gets murkier. For one example, you might have to pay income taxes on some assets like a retirement account if you are forced to cash it out early. There may also be a penalty to pay off before you get the cash. So to make the calculation of how much to expect you can deduct about half from the total you thought you had awaiting you.

If you own stocks, bonds, money market funds, or CD’s then total the worth and subtract things like penalties, brokerage fees, and taxes incurred for early withdrawal.

In the area of real estate, you might own a prime piece of land with a beautiful mansion on it, but if you are forced to sell it off fast, you probably won’t be able to get the offer you had hoped for, even in a good market. You may have to lower your price to get a buyer interested in a hurry. So when you put the price of your home in the total, that number should be at around 20 to 25 percent less than market value.

Next: Hard assets. They are your prized possessions like a painting by Claude Monet you inherited, a used car that still gets you where you need to go, a piece of heirloom jewelry, or that impulse buy you just had to have but now don’t use anymore.

As you saw with the house, you can expect these won’t sell for top dollar, especially if you need to cash in fast. Calculate the assessed value of each item based on things like market guides and appraisals and then decide what your discounted price would be. For the purpose of this calculation, don’t be afraid to slash the price. It’s just a hypothetical calculation. It’s not like you are really selling off your prized vintage toys.

Expect items to lose from 20 to 30 percent of the value, if not more. These items may be irreplaceable or priceless to you but for the purpose of determining liquid worth, give it a reasonable low estimate.

In the end, hard assets are only worth what someone is willing to pay for them.

Another area that is a bit harder to figure is direct investments which can be particularly difficult to sell fast or calculate accurately. One example is if you own your own business which has gathered interest over the years. Again, you’ll need to slash the value almost in half before adding it to your liquid net worth. If you had unlimited time you might be able to go on Shark Tank and pitch it to Mark Cuban, but if you have to sell by next week that’s out.

The real value of calculating liquid net worth

As we noted before, knowing how much cash you can get your hands on in a hurry will help with an emergency plan. If a loved one suddenly incurs a large hospital bill, you’ll know what you can reasonably expect to contribute.

Another useful purpose of calculating liquid net worth is it will help your financial adviser, who can then help you better plan for the future. It may also help you secure a personal or business loan at the bank.

Of course, before you try to take out a loan, it’s a good idea to know exactly how much liquidity you have. Things might look great on paper in initial inspection, which can give you a false sense of confidence. However, when you calculate the real numbers after everything is factored in, it will serve as an important, if sobering reality check. That check could keep your liquidity higher in the long run.

A less likely but still possible reason to know your liquidity is that if there were a market collapse affecting the banks or a natural disaster, then having fast access to an emergency fund will certainly be vital. It may never happen in your lifetime, but nobody can rule it out. While most Americans don’t have the money saved to cover three months of living expenses as recommended by financial advisers, it’s, of course, a good idea to get as close as you can manage.

Finally, just as it is wise to prepare your Last Will and Testament before calamity strikes, it’s wise to prepare detailed information about your assets, what you have learned about them, and who to call in the case you are unable to sell them yourself at some point in the future. For more details on how to leave a trail for your loved ones that will help them when you can’t be there, see this great page.

Take your time and enjoy life

It seems daunting for many of us to come up with something like liquid net worth but it doesn’t have to be done all at once. Take your time and create a spreadsheet that you can contribute to a little at a time. It doesn’t have to be done all at once. In fact, since the value of assets changes all the time, even if you completed it quickly it could soon have to be updated anyway. In the meantime, enjoy each day to the fullest knowing that you’re planning ahead for a better future.

For more on the subject see the videos below:


Featured image: Coins in a jar via Pixabay

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2 Comment

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