When someone asks for your number, in the financial context they may not be trying to pick you up. They could be asking about your net worth. Yeah, that number.
Maybe you know exactly what your own net worth is, or maybe you’re not sure what items count towards it. Whatever the case may be, we all have a net worth. While everyone’s net worth may be different – and even fluctuate over time – it can still give you a snapshot of your overall financial picture.
In addition to net worth, there’s another related concept: liquid net worth. (No, it doesn’t have to do with water.) Liquid net worth is essentially how much cash or cash equivalents you have on hand at a given moment. We’ll go over more of the details and how it compares to net worth ahead.)
Why is it a good thing to know your net worth? There are a few reasons. Net worth can be helpful when you’re assessing both long-term and short-term financial goals. For example, knowing where your assets stand compared to your liabilities (i.e. debts you owe) can help you decide if you need to cut back on your monthly spending, or if you might be able to start socking more away for retirement.
Beyond total net worth, knowing your liquid net worth can let you know what assets you have readily available at any given time. When we talk about having cash on hand, you might think of an emergency fund. But knowing your liquid net worth can come in handy for other stuff, too. Let’s say a great investment opportunity comes up or you’re thinking about a down payment for a second home. Having an idea of your liquid net worth could help you decide if you can take on some of these new money ventures. Here’s what you’ll want to know about liquid net worth.
Before we dive into the liquid net worth definition, let’s briefly review the definition of net worth (after all, a little review never hurt anybody!) Net worth is the total value of your assets (what you own) minus your liabilities (what you owe).
Your net worth can serve as a snapshot of your finances “at a glance,” which can be helpful in determining which kind of financial decisions you can and can’t make.
Liquid net worth is the money you’re left with once you subtract your liabilities from your liquid assets.
For example, in some cases if you have a negative net worth (meaning your debts are greater than your assets), you might hold off before adding more debts. (So that brand-new sports car purchase should maybe wait.)
What we’ve just described is your total net worth. But within your net worth, there’s also liquid net worth. What’s the difference? Liquid net worth is the money you’re left with once you subtract your liabilities from your liquid assets. And if you’re now thinking, “Well, what exactly constitutes a liquid asset?” Read on!
You might’ve already put this part together, but let’s review just for fun. The main difference between total net worth and liquid net worth is liquid net worth doesn’t include non-liquid assets when calculating what you own versus what you owe.
So rather than adding up the value of all your assets and subtracting all your liabilities like you would to calculate total net worth, you’ll only add up your liquid assets, and then subtract all your liabilities from that figure. With that in mind, liquid net worth will often be less than your total net worth.
Simply put, liquid assets are cash and cash equivalents. So that includes cash (of course), as well as money you have in savings accounts, checking accounts, money market accounts, CDs, mutual funds, bonds, and even stocks – phew! Pretty much anything that can be quickly turned into cash while holding onto its market value is considered a liquid asset.
What isn’t a liquid asset? That list includes things like property you own (including your home, if that’s the case), retirement accounts (if you’re not at retirement age), cars, even jewelry and other valuables.
While some of these non-liquid assets may be your most valuable possessions money-wise, the process of getting cash for them could take a while.
Keep in mind: When it comes to liquidity, we want to think about how quickly you could actually have that cash in hand. While some of these non-liquid assets may be your most valuable possessions money-wise, the process of getting cash for them could take a while. Take a home, for example. Selling your home might turn a pretty profit, but the entire sales process could take months (or more!), so you might not see the cash right away. And depending on the timing, if you sell your house in a down market, there could be the potential to lose a sizable portion of that “value.” The same could be said with selling your car or other valuables.
Calculating your liquid net worth can be as simple as subtracting your total liabilities from your total liquid assets.
Total liquid assets – total liabilities = liquid net worth
Let’s take a look at a quick example.
For liquid assets, let’s say you’ve got $175,000 in brokerage accounts, $20,000 in a savings account, $7,000 in checking and $10,000 in cash. The total of your liquid assets comes to $212,000. (Remember, even if you own your house that’s valued at $500,000 and have a $50,000 car, those are not considered liquid assets.)
On the liabilities side, we’ll say you still owe $75,000 on your mortgage, have $15,000 in student loans, and your credit card bills total $5,500. Subtracting the total of your liabilities ($95,500) from your total liquid assets ($212,000) gives you a liquid net worth of $116,500.
As we mentioned, net worth in general can be helpful in giving us a kind of birds-eye view of our overall finances. Realistically though, your net worth may not be representative of how much money you actually have on hand, particularly if you have a few non-liquid assets.
That’s where liquid net worth can be helpful. If you find yourself needing cash for an emergency or opportunity, you’ll probably find that your $700,000 home value won’t come in handy in the precise moment you need money.
But also know that liquid net worth (and total net worth) are still just two measures of your finances. And they don’t necessarily give a full picture of your overall financial health. Things like your credit score, your debt-to-income ratio, and how much you have in an emergency fund can also be great tools for assessing your financially fitness.
This article is for informational purposes only and is not a substitute for individualized professional advice. Individuals should consult their own tax advisor for matters specific to their own taxes and nothing communicated to you herein should be considered tax advice. This article was prepared by and approved by Marcus by Goldman Sachs, but does not reflect the institutional opinions of Goldman Sachs Bank USA, Goldman Sachs Group, Inc. or any of their affiliates, subsidiaries or division. Goldman Sachs Bank USA does not provide any financial, economic, legal, accounting, tax or other recommendation in this article. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice. Information contained in this article does not constitute the provision of investment advice by Goldman Sachs Bank USA or any its affiliates. Neither Goldman Sachs Bank USA nor any of its affiliates makes any representations or warranties, express or implied, as to the accuracy or completeness of the statements or any information contained in this document and any liability therefore is expressly disclaimed.
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