When dealing with finances we hear words like net worth and liquid net worth, but what does this actually mean, how does the knowledge of your net worth affect your finances?
It is beneficial to have some basic knowledge about finances to help you manage your’s and your family’s finances better and also help in making good financial decisions.
In this article, we will be looking at what Liquid net worth is and how it is calculated and how it can be implemented to benefit your finances.
Liquid net worth is the amount of liquid asset like cash or cash equivalents that you own, minus any liabilities or debts that you owe. This means that most liquid asset can be easily turned into cash in short notice, usually from 24hrs to 1 week, examples of liquid assets are savings account, checking account, retirement accounts, shares and bonds.
This means that a non-liquid asset is any asset that you can’t easily converted to cash in a short time. Examples of non-liquid assets are your personal property and cars
Knowing your liquid networth is important as it allows you to assess your financial health and make better financial decisions, such as determining how much cash you have available for emergencies or investments.
Now that you have an idea about what liquid networth is, how does it differ from Net Worth or total net worth? I’m glad you asked. While liquid networth deals with cash and cash equivalents like stock and bonds, net worth involves all the assets that you have which can be liquid or non liquid.
Your total net worth is the difference between your total assets such as real estate, cars, investments, retirement funds etc and total liabilities such as student loans, car loans, mortgage, credit card balances, personal loans etc
There are a few criteria that qualifies an asset as liquid.
When we talk about liquid assets in most cases, we refer to cash and any asset that can easily be converted to cash. As we mentioned above, liquid assets differ from illiquid assets like properties, jewelries, cars and any other asset that can not easily be converted to cash.
So let’s take a look at how liquid net worth is actually calculated with an example.
Let’s assume these are your assets
Your liabilities
To get your liquid networth
In general, having a well-rounded basic knowledge of personal finance will not only help manage your finances better, but it will also help in making better financial decisions and help you avoid a bad financial situation.
Understanding liquid networth means would help you properly analyse your finances and make changes where needed.
One of the rather obvious benefits of having a good amount of liquid networth is the fact that you can easily get your cash back quickly when necessary
Apart from the convenience it offers, it also offers ease of transaction. It’s easy to use and liquidate money in a very short time.
Let’s assume you have some stocks to want to urgently invest in, you can quickly liquidate some of your liquid assets if you don’t have the cash at hand to execute that transaction.
The first step is to eliminate debt. Like we have established above, liquid networth is the difference between your liquid assets and debt so it is logical to improve your liquid net worth by first cutting down your debt or liabilities.
Reducing your expenses will also have a good impact on your liquid net worth, the more cash or cash equivalent you have the higher the liquid net worth. Spending less gives you a good foundation in improving and also maintaining a good liquid net worth.
With reduced expenses you increase the gap between your income and expenses, freeing up more of your income to invest. You can buy shares through index funds or mutual funds or consult with a financial advisor
This is a good way to increase your income, starting a side hustle would also help grow your income which would improve your cash flow and increase the amount of money available to invest or reach your financial goals.
