Net Worth is a common term used in the modern world. We often read the term net worth when we come across an article written on wealthy individuals. Net Worth simply means the cash you have after you deduct all the liabilities from your total assets.
So, in case you read Amazon founder Jeff Bezos has a net worth of $214 Billion, it is the value by which his total assets are exceeding his total liabilities. Although reading someone’s net worth does seem like some shiny object, the real gold would be determining the liquid net worth.
What is Liquid Net Worth?
Just like net worth, liquid net worth is the cash left in your hands after deducting total liabilities from liquid assets. This means the non-liquid assets such as real estate are not taken into consideration. Hence, liquid net worth is an important factor to determine the financial health of a person and it is more accessible due to the quick cash conversion.
How to Calculate Liquid Net Worth
Liquid Net Worth = Liquid Assets – Liabilities
Liquid Net Worth can be calculated by taking the sum of your total liabilities and deducting it from the sum of your total liquid assets. Liquid assets also have some liquidity discount attached to them, as a result, while calculating the liquid net worth you have to consider the discount factor.
Let us take an example to understand the calculation of net worth. To make things easier we will apply a conservative discount rate while calculating. You can apply any appropriate discount rate based on your calculation.
|Assets||Total Value of Assets||Discount Rate||Total Liquid Value|
|Liquid Net Worth||$210,000|
After deducting the total liabilities from liquid assets in the above example, the liquid net worth stands at $210,000.
**A 401(k) plan is a retirement savings account that allows an employee to divert a portion of their salary into long-term investments.
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How to Grow Liquid Net Worth?
Modern society has more wants than needs and that is why many people are debt-ridden with barely any cash left on their hands. This is especially true if you have just started your career and have too much student debt that needs to be repaid or you are going through a lifestyle change that requires you to repay loans. In any case, after calculating the liquid net worth, you may realize that this isn’t what you were hoping for! Following are the tips that will help you to grow your liquid net worth:
1. Increasing Your Earnings
The best way to improve your financial health is by earning more money. Many people are stuck in low-paying jobs or have a single income source that prevents them from improving their financial position. You can improve your earnings by trying to negotiate for higher pay, building a side hustle, or even switching to a better-paying job. Having more money also means that you will be able to repay your debts easily and also save to invest your money while building your wealth.
2. Repay Short-term Debt
It is important to repay your debt as soon as possible to maintain a healthy financial balance in your life. But it is important to repay short-term loans as fast as you can because they carry high rates of interest. Paying off short-term debt at a much faster pace also ensures that you have to pay a lesser interest rate. This will help to pay off your liabilities and in turn increase your net worth.
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3. Spend Less Invest More
The reason why many people run out of cash is that they are spending too much of their money on unnecessary things. You must keep a cap on your overall expenses to ensure that you don’t spend more than you require. You can also invest your money to create wealth which will help you in increasing your liquid net worth. Saving money to repay loans or invest will automatically end up increasing your net worth in the future.
One should keep track of their liquid net worth to determine their financial position. Liquid net worth gives you the real financial picture and also helps to make wiser decisions that can improve your financial position.
Frequently Asked Questions
I need to take a loan to buy a house. Will this affect my liquid net worth?
Any kind of debt always impacts the liquid net worth. However, if you have enough liquid assets to repay the loan then you may still maintain a healthy financial position.
Is it necessary to calculate liquid net worth?
Liquid net worth is an important indicator of financial position and calculating it will help you understand the overall health of your finances.
I have a negative liquid net worth. Is that a bad thing?
It is a bad thing to have a negative net worth. But if you are in the beginning stages of your career or life, you can save, invest and lay off the debt that will result in positive net worth in later stages of your life.
Why is 401k considered while calculating liquid net worth?
401k is a retirement benefit that is considered to be a liquid asset hence it is considered while calculating liquid net worth.
How can investments help me increase my liquid net worth?
Investments are considered to be a second source of income for many people and as a result, they can help your financial position by increasing your liquid net worth.