What Is Liquid Net Worth?

Liquid Net Worth

One might be thinking about calculating the true net worth, so we have made it easier as we have gathered the basics which will help you calculate your net worth. 

Many different ways are available through which you can easily calculate your net worth without facing any problems. 

In this article below, we have gathered each piece of information for you that one might call the total net worth. 

If saying it is a much easier word then, the accurate definition of the total net worth can be called liquid net worth, which we would be explaining to you in detail. 

In simple explanation method, this method will be mostly the same as calculating one’s net worth, but it will probably be involving the accounts and even transactions involved. 

These involved transactions will be much helpful as they would be converting the non-liquid assets into the actual cash amount. 

This is probably the main reason that the liquid net worth is comparatively lower than that of the total net worth so far, so read this complete article to clear your confusion. 

Why Liquid Net Worth Matters:

Why Liquid Net Worth Matters

It can probably feel a little bit good to get the value of total net worth so far, but it is kind of an optimized number so far, and it takes a bit of time to calculate it. 

If one really wants to calculate their net worth, they will be needed to subtract their assets’ gross value. 

Then, your liabilities will be subtracted, which will help you calculate the net worth of yours without facing any of the problems sure, that is not as simple as it seems. 

The liquid net worth will help you reflect on the total amount of money available in your hands, so you will easily be able to liquidate your assets if you need to in a short time. 

The simplest calculation of your true worth that will let you with the perfect amount so far so you will be needed to do the perfect calculations that will include: 

Assets – Liabilities = Net Worth

This is a fact that unless one is holding his assets in the form of liquid so the liquid net worth will be the same as one’s true net worth that will be a bit easier to calculate. 

You might be thinking how it is possible, so this is possible in such a way that it will easily be taking all of the liquidation costs into consideration. 

If one will need to hold their assets in liquids, then the liquid net worth of yours will be really the true net worth of yours that will matter. 

The simplest calculation that will be of the liquid net worth, which will be taken under consideration, will probably look like this:

(Assets – Liabilities) – Cost to Liquidate Your Assets = Net Worth

The main cost that will be liquifying your assets is surely the basic difference between the net worth and the liquid net worth that will come in handy to you. 

Total Net Worth vs. Liquid Net Worth:

Total Net Worth vs. Liquid Net Worth

This will clear your mind, so suppose if you have liabilities of 300000$ in your account and the estimated value of your assets is 500000$ so 200000$ will be your total net worth. 

But if you want to know about your liquid net worth then remember this thing that it will surely be something of a lesser value for sure. 

Suppose, if you are liquifying your assets to start your own business or even helping out a close relative or family member so the liquidation will be needed to be fast and quick. 

This is also a fact that if you are liquefying your assets a bit quicker so you might not get the fuller value of the assets you are liquifying in the market. 

Similarly, if one is selling their house in this condition so it would probably be 10% lesser than the fair market for sure and the same value goes for the sale of your second car or even the vacation home. 

Yes, this is a major point that if one is selling the real estate then that person will surely have to deduct the cost of the transaction and the same situation goes if you are selling financial assets, like stocks, etc. 

The costs of transactions will always be figuring out the liquidation of any of the non-cash assets for sure and your asset’s discount will be depending upon how quickly one will be needed to sell it. 

If you are thinking of liquefying the 500000$ total assets of yours then you will need to discount them by 50000$ then you will have to incur your liquidation costs by adding 30000$ your total assets would be reduced to 420000$.

Then, if you are subtracting from them about 30000$ in liabilities then the total amount of your total net worth will be of 120000$

This is also a point that there would be 80000$ less than the total net worth of yours but it will be representing the actual net worth of yours. 

Suppose, if you are applying for a loan in the bank so the total net worth will be stated there but if you will be in a situation where you are needed to liquidate the assets of yours, then the liquid net worth will be the real number for sure.   

Retirement Plans:

The contribution of net worth in the case of retirements and is the most misunderstood thing from all of the personal assets for sure. 

This is the thinking of many people that if they are having the retirement plan of 200000$ in the plan of 401K that would be making it the total of 200000$ as a contribution in their net worth. 

In reality, it is completely changed then that and that is not even true in this case of liquid net worth which you need to think very keenly. 

The most common reason for it is the income taxes and the retirement plans are offered by tax but it is not in the case of tax-fee. 

If one is needed to liquidate their 401(k)  plan then one would be needed to pay more tax than the ordinary one on the withdrawn amount. 

One will also be needed to pay the additional charges of 10% because of the early withdrawal penalty in most of the cases if one is 59½

If one is combining the tax amount for both the state and the federal tax margin rates as an addition of 20% and not only this, one would also be paying the additional 30% upon the liquidation including the penalty of 10%. 

This tax would be costing you a lot and you won’t be able to do a thing as it would be bringing your plan of 200000$ to 140000$

The liquidation charges would also be payable to the administrator of the plan and as well as the administrator and also there would be the commissions on the sale of assets that would be held in the plan for sure. 

There won’t be much of a difference between them but it would probably be taking out a few more dollars from the value of the plan yours for sure. 

This is the only exception of both Roth IRA and only if you are at least hitting the age of 59 so there won’t be any of the penalties or the charges that you would be needed to pay for sure. 

If one would be meeting all the required qualifications or liquifying the whole of the plan then there won’t be any tax or even penalty required. 

One would surely get the full 200000$ from the plan if all the requirements were surely met and it would surely be a great choice for sure. 

This is a common fact or requirement that if one is under the age of 59½ then you would be needed to pay the income tax and the early penalty of withdrawal on the earnings portion of both Roth IRA.  

Real Estate:

This is an obvious thing that whenever it comes out for going liquid, real estate is probably one of the most complicated assets among all of them. 

It is also a rumor that it just takes no time to sell a property as if there’s a strong housing market even then also it will take a whole week to sell a house.

This is also a fact that if you are selling your house at a slower market value then it would surely have taken months to sell your house for sure. 

It can also be dependent on how quickly you want to sell your house as it would also be dependent on it for sure. 

You will be needed to cut the value of the price so the price would be comparatively a bit below the prevailing market value so you will be selling it right away. 

This is also a fact that if one’s house’s price is 300000$ so if you want to sell it then you will need to drop the price of it down to 280000$ or 270000$. 

Factors that Affect Liquid Net Worth:

What Is Liquid Net Worth

These factors will not be the same and they will change according to the person that would be based on the composition of the holding of them for sure. 

This will surely clear out your mind so if you have most of the assets of yours in the savings of your retirement then the true liquid net worth of yours will surely be a lot lower than someone who has the majority of assets in cash. 

There are different factors of liquidation that are pretty much unique to each asset of their class that would be including: 

True liquid Assets:

They will be including the cash and the cash equivalents. Their examples include:

  • Cash on hand
  • Checking and savings accounts
  • Money market accounts
  • Certificates of deposit (CDs)

As you would also be knowing that there are generally no fees or the consideration of market value with any of such assets but however, they won’t be reduced upon liquidation for sure. 

While talking about the CDs, one would have paid a small penalty if you would be liquifying it before the stated term is over that is mentioned in the certificate. 

How to Calculate Liquid Net Worth:

How to Calculate Liquid Net Worth

We have got the best example for you as it will easily be able to demonstrate the major difference between the total net worth and liquid net worth that will be much helpful to you. 

If one is having assets worth 600000$ and the liabilities are worth 300000$ which will be clearly providing one with the amount of 300000$. 

But if one wants to determine their liquid net worth so they would be needed to look at the assets individually. 

Primary Residence:

The fair market of one’s house is of 400000$ and the mortgage balance amount is od 250000$ which is pretty much outstanding for sure. 

If one wants to sell their house quickly so this might be possible that the value of their house will be dropping to 380000$.

At this price range, there would be another 10% or 38000$ loss as a transaction cost. Paying off the mortgage too. 

The total amount of net cash by selling out your house will probably be 92000$ which will be leftover. 

Cars: 

For instance, if one is having two cars which are probably coming up with a fair market value of 50000$, and one is needed to verify their real value by some well-known auto valuation service. 

There are some of them, most outstanding loans that you will surely be loving and they would be providing outstanding loans of 30000$ and the net value of your car upon sale would be 30000$. 

Retirement Savings: 

The total value of your retirement is 10000$ and you would need to pay 30% in the other taxes with the penalties of 1% as the cost of the transaction so your plan would liquidate easily. 

It would probably be dropping it to 69000$ but you would be having the loan of 401(k) of 10000$ that would be against the plan. 

You would need to pay that loan back upon the liquidation so the cash value of one’s retirement plan would be 59000$. 

Furniture and Trinkets: 

If you are assigning the based on retail on the cost of 50000$ but when sold, they only come up with the value of 10000$. 

If you are having 10000$ in the credit or debit card which are used largely by such possessions and their net value will probably be zero then. 

  • Primary Residence: $92,000
  • Cars: $20,000
  • Retirement Savings: $59,000
  • Furniture and Trinkets: $0
  • Total liquid net worth: $171,000

Final Thoughts!

As mentioned above, now you would also be knowing that there is probably a great difference between the total net worth and the liquid net worth. 

In the example mentioned above, we got out with the amount of 300000$ but after all the deductions and the market factors that included all the taxes and transactions so one was ended up with 171000$. 

There is probably a massive difference of 129000$ that is said to be a long way from the range of pocket change and even the rounding errors so far. 

This is a fact that some of you might think that your net worth might not be correct but in reality, it is not as irrelevant as you think of it. 

In either case, it would be helping a lot as it not only shows your liquid net worth but the total net worth too which you might find pretty handy for sure.  

The conclusion of this article is that the liquid net worth of one is closer to the one’s net worth which is pretty much accurate too and one can easily detect it. 

It is very much helpful and it would be helping you to make a strong case that would be coming very handy to save and invest money without any problem for sure. 

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