Liquid Net Worth: What It Is, Why It Matters, and How to Calculate It

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Liquid Net Worth

Most people have heard of the term net worth, and many also understand what it means.

Net worth is quite simple; the total amount of an individual’s assets, including any cash, minus the total amount of their liabilities or what they owe. So, net worth is the value by which a person’s assets exceed their total liabilities (or net worth can be negative if liabilities exceed assets).

But determining a person’s liquid net worth is perhaps a better tool to evaluate a person’s current financial health.

Related: 9 Convincing Reasons Why You Should Be Tracking Your Net Worth

What is Liquid Net Worth?

Liquid net worth is what you would have left if you sold off all your assets and paid all of your debts. It prioritizes cash and other assets that can be converted into cash quickly and with little-to-no loss in value.

The basic formula to calculate liquid net worth is subtracting your liabilities from your assets (more detail on this later) just as net worth, except only your liquid assets are counted for liquid net worth. While this is an accurate definition, there are some essential factors you need to consider when calculating your liquid net worth.

Net Worth vs. Liquid Net Worth

The critical difference between total net worth and liquid net worth is that liquid net worth ignores or discounts your non-liquid assets (assets you cannot sell quickly). As a result, net worth may be a better gauge of your overall wealth, but liquid net worth indicates your ability to withstand unexpected events and should be considered during financial planning.

In other words, liquid net worth is a more accurate gauge of your current financial stability.

Why Does Liquid Net Worth Matter?

According to Daniel Colston, CFP® and financial advisor with Upward Financial Planning, “Managing one’s liquidity is critical to being able to deploy resources, meet day-to-day or month-to-month obligations, and take care of unexpected occurrences.”

Liquid net worth is significant because not all types of assets are equal or equally accessible. Liquid assets will be precious in an emergency or a situation where cash is needed quickly. If you want true financial freedom, you must be able to sustain something unexpected.

For example, if you or someone in your family has an unexpected medical crisis, and you get a hospital bill of $20,000, what’s more valuable: $20,000 in a savings account or a car with a Kelley Blue Book value of $20,000?

Of course, the savings account is more valuable because you can immediately access that money and know exactly how much it’s worth. You may not be able to sell the car for $20,000, even though it has a Blue Book value of $20,000.

Because liquid net worth only considers your liquid assets, your liquid net worth will be lower than your total net worth, which includes all assets.

There are several benefits to calculating and constantly keeping track of your liquid net worth.

Liquid net worth is critical as it allows you to evaluate your financial security (something many people avoid because they know it isn’t pleasant).

Liquid net worth can also motivate you to create an emergency fund. You should already have a few months of living expenses in a savings account, money market account, or checking account, which are assets that count toward your liquid net worth. You could be vulnerable to unexpected emergencies even with high net worth if you lack liquidity.

It’s also important to remember that everyone’s financial and personal situation is unique. Jordan Rodriquez, CFP®, a financial advisor with Wernick Spear Wealth Managers, says, “Liquidity is what ties an investment portfolio to an investor. If you have no liquidity/income needs for decades, you could potentially invest your entire portfolio in illiquid business, long-dated bonds, speculative stocks, and real estate without facing liquidity risk. But if you need immediate cash consistently, you need assets that can be converted to cash quickly without dramatic changes in value.”

What are Liquid Assets?

Stocks and bonds are great examples of liquid financial assets since you can sell them and have money in your hands within three business days.

They are, however, still taxed. You’ll be responsible for capital gains taxes, which you should consider in your liquid net worth calculation.

Other liquid assets are any cash you have on hand and cash equivalents like saving, checking, and money market accounts.

Couple Managing Their Finances

Non-Liquid Assets

The gray area with this definition is whether or not assets that take more time to sell and put cash in hand can be considered liquid and therefore used in the calculations.

Some examples of non-liquid assets, if we use the standard definition, would be your home, car, and retirement accounts such as a 401k or IRA. Liquidating (selling) something like your home could take several months, and you might not find a buyer. Although you might be able to get the money, it won’t happen immediately.

Additionally, the amount of cash you’ll walk away with will be less than the value of your home due to realtor commissions, taxes, and fees.

These non liquid assets and other income-producing assets would be considered while calculating your total net worth, but maybe not in your liquid net worth.

Real Estate

While equity in your home is essential, it’s not quite as helpful as cash. The typical net worth calculation values all assets the same, so $50,000 in cash would be the same as $50,000 of equity in your home. But liquid net worth will either ignore the equity in your home or reduce the amount to allow for transaction costs or selling below market value to liquidate it quickly.

When calculating liquid net worth, the goal is to determine how much cash you could get for all your assets. For example, if you had to sell your house or investment property quickly, how much cash would you walk away with? That $50,000 of equity might be more like $10,000 if you have to sell quickly below market value (and with realtor fees).

Retirement Investments

Similar to your home, retirement funds are not liquid assets.

For example, if you have an emergency and choose to withdraw from your 401k before you reach 59.5 years old, you’ll incur a 10% penalty on investment earnings. That’s a hefty price that can seriously eat away at the total value of your assets. And don’t forget that you’ll also have to pay ordinary income tax on the money you get from a 401k or Traditional IRA.

But, of course, that doesn’t mean that retirement accounts have no value to you today. You can still remove your contributions (not your gains on your contributions) without being taxed. So that’s another factor you may want to consider when calculating your liquid net worth.

Couple Calculating Their Liquid Net Worth

Different Ways to View Liquid Net Worth

Some people consider liquid net worth the amount you can get immediately, within a set period like 24 hours or seven days. Others add in their home and retirement savings, depending on how long it would take them to receive the cash.

A common approach to calculate liquid net worth is to devalue assets like your house, car, and retirement account by 10-30%. This accounts for fees, the cost of selling, or the fact that you might not get fair market value if you have to sell quickly.

There’s no exact liquid net worth definition or rules for calculating. So it’s up to you to decide what you want to include and how much you’ll deduct from assets like a home, car, or retirement account.

If you plan on including your retirement savings, car, and house in your liquid net worth, we recommend placing around a 10-30% deduction on each asset to make them fit in the liquid net worth definition.

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It’s critical to realize that although non-liquid assets do not increase your liquid net worth, they still hold value. Therefore, the way you calculate liquid net worth may differ from someone else, or you may even choose to calculate two versions of your liquid net worth.

It would be best to consider why you’re calculating your liquid net worth. For example, if you’re trying to get a more accurate picture of your overall financial position, maybe the best approach is to include all your assets in the calculation and reduce the cash value of non-liquid assets like a home, cars, and retirement accounts.

But if your primary reason for calculating liquid net worth is to see how prepared you are for a financial emergency, maybe the best approach is not to include the non-liquid assets at all since you wouldn’t be able to sell them quickly.

How to Calculate Your Liquid Net Worth

It’s pretty simple.

Liquid Net Worth = Total Liquid Assets – Liabilities

As we already discussed, assets include:

  • Cash (including checking accounts)
  • Savings
  • Stocks, bonds, mutual funds, etc.
  • Retirement accounts (you can omit this or reduce the value to account for fees/penalties/taxes)
  • House (you can omit this, as discussed before, or have the 10-30% deduction)
  • Car (you can omit or include an undervalued amount)
  • Jewelry, art, collectibles, etc. (these can appreciate, depreciate, or stay the same)

Liabilities include things like:

  • Total outstanding mortgage balance
  • Credit card debt
  • Student loan debt
  • Car loans
  • Personal loans, payday loans, and other loans
  • Any other types of debt

Calculating your liquid net worth may be an eye-opener and make you appear in worse shape than you thought. However, it’s an essential exercise to achieve financial freedom and build assets.

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Calculating Liquid Net Worth: An Example

Let’s take a look at an example of how you would calculate liquid net worth.

Create a spreadsheet and insert liquid assets and liabilities.

First, include all your liquid assets in one column and decide how much to discount those that aren’t cash equivalents.

AssetValueDiscountValue After Discount
Cash $50,0000%$50,000
Home Equity$100,00020%$80,000
Total Assets$305,00014.8%$260,000

Next, add all of your liabilities and subtract them from the liquid value of your assets.

Update the data in the spreadsheet as needed, as your home may appreciate, your car will probably depreciate, etc.

Don’t despair if the final figure is lower than you expected. Focus on paying off your debts (liabilities) if you have a negative liquid net worth. If and when the number is positive, set a goal for your net worth and work on achieving that. Continue reading for some tips on how to increase your liquid net worth.

Related reading: How to Calculate Your Net Worth

How to Increase Your Liquid Net Worth

1. Review and Reduce Your Liabilities

One of the most basic ways to improve your financial situation is to reduce your liabilities or debts. Paying down your debts (especially high-interest credit card debt) will reduce the amount you owe, so it’s not dragging down your net worth or liquid net worth.

If you’re looking for a strategy to pay off debt fast, see our comparison of the debt snowball vs. the debt avalanche.

2. Trim Your Expenses

Many people spend far more than they need to. Track all of your expenses and look for areas where you can cut back (I guarantee there will be many).

Consider budget categories that could be reduced or eliminated when you look at your monthly expenses. Then, take them one at a time. Work on making one change, then move on to the next.

3. Review Your Annual Costs

This is another overlooked aspect in many people’s financial lives. You probably have several bills and expenses paid quarterly, semi-annually, or annually. Look at things like insurance premiums, vacations, and other periodic costs.

4. Start a Side Hustle

Having multiple streams of income is smart. Not only will it add to your primary source of income (9-5 job), but it will add safety in case you lose that primary source of income.

A good side hustle can earn anywhere from $100 to several thousand dollars a month. Freelance writing, selling crafts on Etsy, starting a blog, and transcription work are great side hustles you can start with only an hour per day or whenever you have time.

5. Start Investing

Of course, if you want to increase your net worth, you should be investing. You could invest in stocks, securities, mutual funds, ETFs, real estate, or alternative investments. What’s right for you will depend on your situation, age, current net worth, and financial goals.

We highly recommend investment apps like, Webull, and Moomoo. They’re user-friendly and remove many barriers that typically prevent people from investing in the stock market.

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Frequently Asked Questions

What is considered liquid net worth?

Calculate or determine your liquid net worth by adding your liquid assets and subtracting all your liabilities. When you’re adding the total of your liquid assets, you can count only the entirely liquid assets (like cash and cash equivalents like savings and checking accounts). Alternatively, you can reduce the value of non-liquid assets according to how much money you could get right now for the asset. For example, the value of your home equity would be reduced by the realtor fees and other transaction costs you would incur if you were to sell the house.

What qualifies as a liquid asset?

Cash, checking accounts, savings accounts, stocks, bonds, mutual funds, and ETFs will almost always be counted toward your liquid assets. The exact details will depend on how you define liquid net worth.

Does liquid net worth include your house?

No, generally, it does not. Selling a house takes time, and even in a good market, you would have to wait at least a month until you’d get the cash for your home. Fees, transaction costs, and taxes will also cut into the money you walk away with, especially if you have to make a quick sale. For these reasons, a house is an illiquid asset.

Is a 401(k) considered liquid?

No, retirement accounts like 401(k)s and IRAs are generally not considered liquid. If you’re under 59.5, you will likely pay penalties if you withdraw money from your retirement accounts. At any age, you’ll owe income tax on the funds withdrawn (Roth IRAs are the exception).

Is a CD a liquid asset?

It depends. Most CDs will involve a small fee or withdrawal penalty if you take the money before maturity. However, some CDs are penalty-free. If you would face any penalties for taking money out of your CDs, reduce the value by that amount when calculating liquid net worth.

Is a car a liquid asset?

Generally, a car is considered a non liquid asset. Cars can be sold quickly in some cases, but it’s also possible that it could take a while to sell your car, and it’s also challenging to know how much you could get for it.

Are stocks and bonds liquid assets?

In general, yes, company stock and bonds are considered liquid assets because they can be sold at any time and converted to cash quickly. However, remember that you’ll have to pay capital gains tax on the investment gains.

What does it mean if I have a negative liquid net worth?

Negative net worth and negative liquid net worth are typical. This is especially true if you’re in the early stages of your career or have large amounts of student debt. Follow the steps in this article to reduce your liabilities and increase your assets.

Final Thoughts

Liquid net worth may not get much attention, but it’s a vital personal finance metric you should be aware of. Take some time to calculate your liquid net worth and see if you’re surprised by the results. Then, if needed, follow the suggestions in the last section of this article to improve it.

And if you need personalized advice, seek guidance from a financial advisor.

READ NEXT: Living Off Dividends

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