Navigating Your Finances: The Power of Liquid Net Worth and the Art of Its Calculation

UNDERSTANDING YOUR FINANCES
Easy Guide to Liquid Net Worth: What It Is, and Why It’s Important
Picture this – you know your net worth, which is simply what you own (your assets like cash) minus what you owe (your liabilities or debts). But have you heard of liquid net worth? It’s a practical way to look at your current financial situation.

Liquid net worth is basically the money you’d end up with if you sold everything you own and paid off all your debts right away. It focuses on cash and assets that you can quickly turn into cash without losing much value.

Want to calculate your liquid net worth? You just subtract your liabilities from your liquid assets. It’s like calculating your net worth, but you only count the belongings that can be quickly changed into cash.

But why should you care about liquid net worth? According to Daniel Colston, a financial advisor, it helps to manage finances to meet everyday responsibilities and unexpected expenses. For example, consider an unexpected medical bill of $20,000. Which is more useful – $20,000 in a savings account, or a car valued at $20,000? Obviously, the savings!

Having a high liquid net worth can help you be more financially secure and ready for any emergency that needs immediate cash. Plus, it might motivate you to build an emergency fund – a pool of money that could cover a few months of living expenditures.

When you crunch the numbers, your liquid net worth will usually be less than your net worth because it only considers assets you could quickly turn into cash. To boost your liquid net worth, start by reducing your debts. Then, cut back any unnecessary expenditure from your budget. If possible, generate additional income through side jobs.

Don’t forget that different people have different financial and personal circumstances. As Jordan Rodriguez, a financial advisor, states, “If you need immediate cash consistently, you need assets that can be converted to cash quickly without a significant change in value.”

Here’s a simple way to spot your liquid net worth:

Liquid Net Worth = Total Liquid Assets – Liabilities

Liquid Assets can include:
– Cash
– Savings
– Stocks, bonds, mutual funds, etc.
– Retirement accounts (you can reduce the value to account for taxes or penalties)
– House (only add this if you reduce its market value by 10-30% to consider fees for a speedy sale)
– Car (similar to a house, you can add this after reducing its market value)
– Valuable items like jewelry, art, collectibles, etc.

Liabilities can include:
– Outstanding mortgage balance
– Credit card debt
– Student loan debt
– Car loans
– Other loans and debts

Doing this calculation can be eye-opening and also a little scary, but it’s the first step to take control of your financial life and build a secure future. Good luck with your journey towards financial freedom.

To learn more, consider reading ‘Living Off Dividends’.

The finance platforms Public, Moomoo and Webull offer investment opportunities, so they could be worth a look. Remember, managing your finances is crucial to financial well-being.