Every month, I put out a net worth statement just so that I can personally track how my net worth has been improving. Recently, I have seen many other people put out their net worth as well. As I look at them I notice, there is a difference between mine and theirs. I happen to have more of a liquid net worth than they do.
Liquid Net Worth
Liquid Net Worth is something most people do not talk about. People talk about net worth in general. “Oh, I have a million dollar net worth.” “Oh, I have one billion dollars.”
Being a millionaire is a great goal, but how much do you need in terms of net worth to be able to stop working.
We can make all the money in the world, but being rich and wealthy is totally different. Wealthy people have high net worths, rich people make a lot a money.
Now there are not many of us that are billionaires out there, but let’s look at Bill Gates. He is one the wealthiest men in the world worth around $131 billion dollars. He is one of those rare billionaires. Now that is his net worth. It is not his liquid net worth.
You heard me right, Bill Gates is worth that much because most of his money is in Microsoft stock and other assets..
Let’s first dive into what net worth is.
What is Net Worth?
The classic definition of Net Worth is basically assets minus liabilities.
Net worth = total assets – total liabilities.
What is an asset?
An asset is something that has some sort of worth.
As you think about lots of things could be assets. Such as:
- Real Estate
- Other Valuables.
What is a libability?
A liability is something that you owe money on like debt.
Liabilities would include:
- Credit card debt
- Student Loan debt
- Any other debt
What is Liquid Net Worth:
Liquid net worth is basically your cash that is available to you.
So these are things that are cash in the bank like in your checking account or savings account or something that can be converted to cash quite quickly.
These could be your bonds, stocks in a taxable account, or cash sitting in your emergency fund. These are all liquid assets that can be converted to cash.
Non Liquid Assets would be:
- A house
- A car
- Retirement accounts ( 401ks, IRAs, Roth IRA)
- Anything that may take a while to sell.
- Fixed Assets ( Bonds, CDs,)
- Taxable Account
Why is knowing your Liquid Net Worth Important?
Knowing your liquid net worth is about knowing how close you are to retirement. This is the cash that you can walk away from a job from. It is basically your F-U Money.
Being able to have enough for an emergency is great. You have an emergency fund to save you in the bad times.
Plus you may even have a sizable taxable account full of stocks and bonds that can help you live in early retirement.
Yes, early retirement. We often save in our retirement accounts until that day we stop working in our 60s. If you could stop early would you do anything to make it happen?
Here are some of the net worth's done by age, and see how you compare to help you make a decision on how much liquid net worth you need.
Most of our retirement accounts are illiquidable. They are just hard to touch without facing massive fees.
It is still good saving in them, but this is not going to be the money keeping you going in early retirement. You will need to sell stocks, and be able to touch dividends.
Creating a taxable account is a must.
What about my house?
Your house is an asset. Sorry to break it to you, it is just not a liquid asset.
Having a house that can generate returns for you which is great, but a house is far from being liquid.
You have to sell it, pay fees, find somewhere else to live. There are just too many variables. It is a great asset that you can use to obtain leverage, but it is hard to make it liquid.
People often think about your house being one of the greatest assets. True. It gives us peace of mind having a place to live.
It can give us leverage to buy other investments as well.
The house also has value and if you sell it one day you can reap the benefits of holding on to it for many years.
There are many ways we can use home equity to create more wealth, and people often use a house to also create passive income through airbnb, rentals, and even through house hacking.
A house can be a great income-producing asset.
They are just hard to sell in a pinch without losing money.
Achieving our Early Retirement Goals:
As we think about our liquid net worth we need to think about some of our goals. Why do we need to track it? Is it worth it to have so much in a liquid form? How much do we need to retire?
I like to track things to help me know where I came from and where I want to go. That is why I track my net worth.
A great way to track it is you can use apps like Personal Capital which will help you know on your device.
I am old school and use an excel sheet or a google sheet. Here is one I got from Budgetsaresexy.
Net Worth is important, but liquid net worth I think is more important. We can always know how much we are worth, but how much money you have on hand can be a game changer.
You can go anywhere in the world you would like to go. Assets like houses or cars are not holding you back.
How can we increase our Liquid Net Worth?
1. Saving money:
Saving money is one of the easiest ways to bring that liquid net worth up. First, you need to look at everything you are spending. Then go and cut out anything that does not bring value to your life.
Like if you have cable tv, but spend your time on Netflix 90% of the time, then cut the cable.
It is amazing to see the power of saving your money. Just saving an extra 5% can really cut down your time you have to work.
Being able to save money is a great way to increase that liquid net worth. The money will already be there, you just need to choose to not spend it.
2. Get rid of debt.
Debt can be so crippling for people’s finances. Not all debt is bad. A mortgage is not bad as long as you have a low fixed rate, and can make the payments.
Credit card debt and unwanted car loans can really kill someone's financial journey. Try to get rid of those high interest loans and debt as soon as you can. You can then use the leftover money for investments.
Being able to save your money instead of paying it for high interest debt can really make a difference in your financial journey. Many people have struggled with debt before so do not feel that you are alone.
Work on trying to get rid of this debt. This will help you with stabilizing your future.
3. Earn More Money
Some people may think this should be number one. I would think similarly, but sometimes it is hard to make more money. So if you can accomplish #1 and #2 first then making extra money may be the least stressful out of the top 3.
Here are some ways to help you earn more money:
- Look for side hustles.
- Ask your boss for a raise
- Switch companies for a higher pay.
- Move to a lower cost of living area with the same pay or similar pay.
There are numerous ways to go about earning more money. You just need to think, strategize, and make it happen.
4. Invest in your Taxable Account
Investing is so important for your future. Being able to put money aside for your retirement is so important as well. Never forget to have money for your nest-egg.
Now, besides that start putting your money into your taxable brokerage account. This is the liquid net worth part that can really allow you to live in early retirement.
Keep your investments simple. Investing in good old fashion index funds works for a ton of people.
Low-cost index funds is how I am investing, and it always matches the market. I never try to beat the market, I am just in it to mirror the market. It works, and the market goes up.
Some Last Thoughts:
As we start to think and plan for our financial futures. It is best to take a look at your liquid net worth. See what you can do to increase it. Make plans to earn more money, save more money, get out of debt, and start investing more. .
People never think too much about their liquid net worth. It is all about their total net worth.
Even though I talk about net worth, I also see what my goals are. I want to get that taxable account to hit enough for financial freedom and stop working or at least hit Barista FIRE.
Personal finance is personal. You do you.
What is your liquid net worth? Do you track your net worth?
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I’m Steve. I’m an English Teacher, traveler, and an avid outdoorsman. If you’d like to comment, ask a question, or simply say hi, leave me a message here, on Twitter (@thefrugalexpat1). Many of my posts have been written to help those in their journey to financial independence. I am on my journey, and as I learn more I hope to share more. And as always, thanks for reading The Frugal Expat.
11 thoughts on “What is Liquid Net Worth.”
For a while, I put off calculating my net worth. I had a sinking feeling that I wouldn’t like what I saw. Well, June of last year I confronted my worries and was met with dull reality – my net worth was a pitiful! I wallowed for a bit but then put my big girl pants on and focused on progress, not the past.
Ten months later, my net worth has increased 54%! Turns out, focusing on what I can do is more valuable than focusing on what I didn’t do. Who knew? 😅
That is a great lesson to learn. April of 2020, I started to track my net worth. I had no idea what it was, and I wanted to have an accurate picture of where I was, and where I needed to go. Fast forward to 2021, and it has increased over $100K.
Tracking net worth is good in many ways. First we know where we are, and then we can plan to how to fulfill our goals. Second, we can be accountable. Tracking it helps our accountability to ourselves.
Having too much of the overall fortune in non-liquid assets is concerning, it has the point and I totally get it.
From this point of view I’m doing a good job maintaining my personal finance but a little bit to… extreme.
Because my liquid net worth is almost all of my net worth and I’m not sure should it be a concern…
Also in some definitions fixed assets seem to be classified as non-liquid assets for its yield to maturity is usually greater than a year? Please correct me if I’m wrong, thank you!
At this point, Tommy, you are young. Having a liquid net worth that is almost all of your net worth is not bad. If it is all in cash, it may be better served being in investments, but if it is in stocks then that is not bad at all. I would say 75% of my net worth is liquid. I have the other 25% in retirement accounts.
Fixed assets like CDs or bonds could be taken out earlier. They will just incur a penalty. So they can be liquid as well. Often when there are dips in the stock market, people may cash out bonds and buy into stocks. I hope this helps answer your question.
Hi Steve, thanks for giving me faith haha…
Yes that makes sense, thanks for your answer!
Ah, liquid net worth. I love the picture of the coffee you put on the blog to demonstrate liquid net worth, ha.
I have so much money tied up in illiquid assets and people tell me that I should be worried as a result but I’m not so sure. Time will tell.
It all depends. If your money is in income producing assets like a house bringing in rent, then that may not be so bad. If your money is sitting and growing in an investment account for retirement like a 401K or IRA, then that is not too bad.
I think if we make it a point to put all of our money into our house, and therefore we are “house rich” and “cash poor” that can be a problem. People talk about having a million dollar net worth, but own a house that is worth a lot. Well, you will have to sell it to get some of that money out.
Personal finance is personal. I have money in a retirement accounts and I put money into my taxable account. Where I am located it is not feasible to own property so as a nomad I push my extra money into my brokerage taxable account.
Time will tell. It is up to you. Remember personal finance is personal. Not every person is the same. You do you.
Yeah once you get to a certain point I don’t think you have to worry about liquid net worth quite as much.
But I don’t think that anyone without a solid liquid net worth should be thinking about tapping into a HELOC or anything.
I will also say with my experience selling cars that they are illiquid in nature, but typically it only takes a couple of days to sell the car (worst case scenario).
Selling cars can go quick, but you just need the right price, the right salesman, and a good time of year. I sold cars once in my life. Quite honestly, I was terrible at it. I did see great salesmen make some good money. So they could sell fast.
Calculating net worth is ‘worth’ doing every six months or once per year.
We definitely track out Net Worth – for the same reason you mentioned.
We are trying to increase our earnings after taking a huge dip, but it’s nice to see we are on the right track 🙂