What Is Liquid Net Worth?

Liquid net worth is the amount of money you have in cash after subtracting liabilities from liquid assets. To put it simply, it’s money that you can tap into for bills, emergency expenses or high-ticket items.

The term “liquid” describes cash at hand or assets that you can convert into cash within a short period. Liquid net worth is often confused with total net worth, but these terms have distinct meanings.

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Liquid Net Worth Example

Assume this is the financial situation of Company XYZ:

  • Cash: $150,000
  • Savings account: $60,000
  • Checking account: $40,000
  • Stock and bond investments: $250,000
  • Equipment: $75,000
  • Credit card debt: $5,000
  • Accounts payable: $60,000
  • Mortgage: $100,000
  • Salary: $100,000

If the business wanted to calculate its net worth, it would need to subtract its total assets from total liabilities.

Total assets include cash, savings account, checking account, stock and bond investments, and equipment, so:

$150,000 (Cash) +$60,000 (Savings account) +$40,000 (Checking account) +$250,000 (Stock and bond investments) +$75,000 (Equipment) = $575, 000 in Total Assets

Total liabilities include credit card debt, accounts payable, and mortgage, so:

$5,000 (Credit card debt) +$60,000 (Accounts payable) +$100,000 (Mortgage) +$100,000 (Salaries) = $265,000 in Total Liabilities

Net worth would equal $575,000 minus $265,000 = $310,000.

Liquid net worth is similar, except you don’t include non-liquid assets. Your liquid assets include cash, savings account, checking account, and stock and bond investments, which equal to:

$150,000 (Cash) +$60,000 (Savings account) +$40,000 (Checking account) +$250,000 (Stock and bond investments) = $500,000

Liabilities remain the same, so liquid net worth amounts to $500,000 – $265,000 = $235,000.

As you probably notice, in this case, your net worth of $310,000 is significantly higher than your liquid net worth of $235,000. The reason for this is because the equipment isn’t a liquid asset, and thus, your liquid net worth amounts to a lower value.

Why is building liquid net worth important

Cash is king, which is a big reason why building your liquid net worth is so important. Of course, overall net worth is a great way to build wealth however, having a liquid net worth is important if you need to get access to cash quickly. 

For instance, for an emergency or an investment opportunity. Liquid net worth matters because it enables you to have access to cash fast.

Tracking Liquid Net Worth

The liquid net worth includes assets that are easily converted to cash, such as savings account balances and mutual funds.

We should also include the value of our home in this calculation if we’re going to use it for a down payment on another property.

In other words, you want your liquid net worth number (including any equity from your home) to be at least twice the amount you want for a comfortable retirement.

Benefits Of Tracking Our Liquid Net Worth

  1. You can assess your current net worth and see how it changes over time. If this number is decreasing, then you should take action because that might mean there’s an emergency on the horizon (e.g. you’re living paycheck to paycheck).
  2. You can see how liquid net worth changes over time, which will help you make more informed decisions about your investments.
  3. One of the main benefits is that it helps us stay on top of our goals and priorities so we know where to put our money when it comes time for investing. If we want to buy a house in five years, it’s good to know how much liquid net worth we’ll need and where we can get that money.
  4. Tracking our liquid net worth is an easy way for us all to stay on track with financial goals.


This is another area where getting a quick sale will probably cost you some money. To calculate your liquid assets for a vehicle, reduce the current value by about 20%. You can use a source like Kelly Blue Book to help you get an estimate of the current value if you’re not sure.

Liquid Net Worth Calculated

You can determine your liquid net worth by taking the total sum of your liabilities and subtracting that from the total sum of your liquid assets. However, some liquid assets may come with a liquidity discount, so you’ll want to factor this into equation when calculating your final liquid net worth.

For instance, let’s say you’ve got $20,000 in cash, $150,000 in brokerage accounts and $101,000 in a 401(k) account. If these are your only liquid assets, the total sum of your liquid assets is $271,000. If you only owe $5,000 in credit card debt and $42,000 in student loans, the total sum of  your liabilities is $47,000. Subtract that from $271,000, and your liquid net worth is $224,000.

Where Do You Stand?

You may be interested in comparing your net worth with the figures in the chart below of median and mean net worth of all Americans by age group, compiled from a survey for the Federal Reserve. The median is the middle number. Half have less net worth, and half have a greater net worth. The mean number is the average net worth.

Don't place too much importance on your net worth total in comparison with these numbers. This is national data with no demographic breakdown. For instance, living in the Northeast versus the South nearly doubles net worth. People in the Northeast generally earn more and pay more to keep roughly the same standard of living.

Age of Person Median Mean Less than 35  $13.9 $76.3 35-44 $91.3 $436.2 45-54 $168.6 $833.2 55-64 $212.5 $1,175.9 65-74 $266.4 $1,217.7 75 or more $254.8 $977.6 Figure 1. Household net worth in 2019 (thousands of dollars)

Also, note the big differences in mean and median net worth in each age category. Remember that the mean number is the average number. A relatively few very affluent people can skew the average. That may be why the mean net worth of Americans younger than age 35 tops $76,300.

Retirement accounts

There will be taxes and penalties on your retirement accounts if you withdraw funds before you’re retired, so the current amount in these accounts isn’t the same as cash. A good rule of thumb is to take off about 30% of the current value to account for penalties and taxes due.

The exception to this rule is the Roth IRA, which will allow you to withdraw funds you’ve contributed without penalties. You’ll only pay the penalties on the gains, so penalties on these accounts are substantially smaller.

What Are Non-Liquid Assets?

Non-liquid assets are assets you own that cannot be easily converted into cash, due to high transaction costs, long timeline for sale, or other factors.

Here are some of the major types of non-liquid assets.

Real Estate

While I love real estate investing, most forms of real estate are definitely not liquid. This includes your own personal home. Some of the main things that make real estate a non-liquid asset include:

  • it could take 3-6 months or more to sell a house once it’s on the market
  • transaction fees in the form of real estate commissions and closing costs are high (typically 8-10% of the sales price)
  • if you need to sell quickly, you will generally need to take a significantly discounted offer

Retirement Accounts

Similar to real estate, retirement accounts do not fit the definition of a liquid asset. While there are limited situations where you could take a withdrawal before retirement, you would generally have to pay a 10% penalty on top of the taxes due.

Raiding your retirement accounts for a short-term emergency should be avoided if at all possible. Retirement accounts include:

  • Traditional and Roth 401(k)
  • Traditional and Roth IRA
  • Solo 401(k) if self-employed
  • 403(b)

Personal Property

Most other hard assets you own that may contribute to your overall net worth are also non-liquid, such as:

  • cars
  • jewelry
  • art and other collectibles
  • furniture

While these assets do hold value, they would be difficult to sell quickly, or you would have to take a steep discount in order to sell. Nobody wants to take their wedding ring to a pawn shop just to cover the cost of an emergency!

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What if I have a negative net worth?

So, what happens if your total net worth is negative? You could have more debt than assets which would result in your net worth being negative.

For instance, student loans, credit card debt, etc. could result in you owing more than you actually have in cash and assets. However, you are able to improve your total net worth and increase your liquid net worth by taking the initiative with the following steps!

Net Worth vs. Liquid Net Worth

Your net worth is the total value of all of your assets (things you own) minus your liabilities (things you owe).

Net Worth = Assets – Liabilities

When considering your liquid net worth vs. your net worth, your liquid net worth only counts your liquid assets and your current (not long-term) liabilities. So if you knew your net worth, you could calculate your liquid net worth by subtracting your non-liquid assets and adding back in your long-term liabilities.

Liquid Net Worth = Net Worth – Non-Liquid Assets + Long-Term Liabilities

Calculating Liquid Net Worth: An Example

Here’s the formula used to calculate liquid net worth.

To calculate your liquid net worth, you need to list your liquid assets 一 cash, cash equivalents and, any other assets that you can quickly convert into money. The next step is to list your non-liquid assets. You can then subtract your total liabilities from your liquid assets 一 the resulting number is your liquid net worth.

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Let’s say you’ve got $90,000 in your savings accounts, $150,000 in brokerage accounts, and $60,000 in bonds. Your total liquid assets would be $300,000. If you have a car with a fair market value of $30,000, $143,000 left on your mortgage, you owe $42,000 in student loans and $5,000 in credit card debt the sum of liabilities is $220,000. When you subtract your total liabilities from your liquid assets, your liquid net worth is $80,000.

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Current Liabilities

We mentioned ‘current liabilities’ before. Let’s touch on that for a bit. According to Investopedia, “Current liabilities are a company’s short-term financial obligations that are due within one year or within a normal operating cycle.” Current liabilities, as apparent from the name, only consist of your debts or other liability expenses that you are facing currently or in the near future.

This helps us understand both sides of your liquid net worth. It doesn’t comprise your liquid assets only but also depends on subtracting all your current liabilities from it. Only then do you get an idea of if you have enough money left to weather everything afterward.

Your current short-term liabilities could be in the form of a variety of different things. It could be your due mortgage, car payments or installments, personal debts, student loans, taxes, credit card bills, etc.

Why is it Important?

Often time we find ourselves in unexpected predicaments. Something taxing, such as paying off a loan, losing your job, or an unforeseeable medical treatment, could come up. How do you properly budget your funds then? And how do you know if you have enough money to last yourself through this specific quandary? If your car broke down today beyond repair, will you have enough resources to buy yourself a new one?

Liquid net worth and net worth usually sound very alike. The difference between both, as explained above, might not seem huge, but both give you metrics about entirely different things. Think of it as a long-term and short-term safe deposit. Net worth is that long-term safe deposit you should not rely on because it means selling everything you possibly own as an asset. Whereas your liquid asset is more likely the money that is reliable. It is the money you could have at hand currently, should you find yourself in the middle of any crisis. It only accounts for you selling off your liquid assets.

Having a good grip and understanding of how much liquid net worth you have could help you properly plan things long before they have even happened. This will also end up providing you relief and help in making your life’s financial decisions. Once someone understands the limit of how much money they can allow being spent as damages or any other expense, their risk assessment improves tremendously.

This will ultimately also help you determine how much money you would have left after all this is done and over with. And if this can help you support and sustain yourself and your business any further.

Liquid Net Worth Definition

Therefore, the most common definition you’ll

Therefore, the most common definition you’ll see for liquid net worth is:

Liquid Net Worth = the portion of your net worth held in cash or that is easily converted to cash.

Most sources will translate this to simply mean your cash plus your “close-enough to cash” items, like stocks and bonds. They’ll completely chop off any value of your home and retirement accounts, and call it a day.

This is a total oversimplification, and we can do better. So, let’s run through a few common balance sheet items.

Is a house a liquid asset?

The textbook answer is no.

But, that’s not to say your house is worthless either. We all know a $250,000 home is worth, well… about $250,000. When calculating your liquid net worth, the question becomes how realistic is that $250,000-ish asset?

Three things to consider:

  • Depending on the real estate market you’re in, completing the sale of a house could take anywhere from a few weeks to a few months.
  • Real estate sales also come with some notable costs, most notably the typical 6% fee paid to your realtor.
  • In the haggle-first world of real estate, there’s also no guarantee you’ll get your full asking price once the negotiations finish.

For all these reasons, I recommend applying a percentage discount to the value of your home when calculating your liquid net worth.

Anywhere from a 15-20% discount would be reasonable to account for the length of sale and typical costs.

Is a 401k a liquid asset?

Again, the textbook answer is no. For the following reasons:

  • Technically, withdrawing 401k or other retirement funds prior to age 59.5 will incur a 10% penalty.
  • If you have a Traditional 401k, you’ll also owe taxes. (At your marginal tax rate – 22-24% for most wage earners)

And again, that “no” answer is somewhat misleading.

Your 401k has a real value. And in a true liquidity pinch, you could get the money. Plus, with a bit of planning, savvy money wizards reaching early retirement can use a Roth IRA Conversion ladder to avoid the 10% penalty and limit their taxes owed.

Nonetheless, we’ll stay conservative and apply a 30% discount to our 401k balances.

Is a Roth IRA a liquid asset?

Another textbook no. Followed by my, “well… sort of!” response.

Remember, we can always hack our Roth IRAsby withdrawing the contributions tax free!

BUT, withdrawing any investment gains prior to age 59.5 would mean we’d owe:

  • 10% early withdrawal penalties
  • Taxes on the gains at your marginal tax rate.

At the time of this writing, my Roth IRA is worth $25,000, of which $22,000 are my own contributions.

Doing the math, I’d pay:

  • 10% early withdrawal penalty on the gains = $300
  • Taxes on the gains at my marginal tax rate = $720

Total cost? $1,020 or 4% of the account balance.

Someone with a larger portion of gains would want to adjust this discount value accordingly.

Are stocks and bonds liquid assets?

Yes, they are. I could sell all the stocks and bonds in my brokerage accounts and have money in my hand within 3 business days.

The only catch is that the gains on the sale are subject to taxes. But if you’ve held the stocks for over a year, you qualify for a reduced tax rate of 15%, known as the “long term capital gains” tax.

(Read that again. 15% of your gains – not the total value of your brokerage account.)

For example, my brokerage account is currently worth $122,000, of which $46,000 are investment gains.

If I sold everything today, I’d pay a 15% long term capital gains tax on $46,000. The $6,900 bill I’d owe Uncle Sam represents 5.6% of the total account value.

Obviously, how much you should discount your brokerage account depends on how much gains you have in your portfolio. As a rule of thumb though, discounting your brokerage portfolio by 5-10% is a reasonably conservative amount.

Final Words

Keeping track of our liquid net worth is important when it comes to judging our financial stability, and growing your liquid net worth helps achieve financial freedom early on in life.

We hope we have been able to clear all your doubts regarding the topic of liquid net worth and how important it is when it comes to making decisions regarding your financial stability and growth.

Your liquid net worth determines the funds you have in the time of an emergency. Hence, it is essential to keep track of it and grow it as much as possible to be financially independent early on in your life, and having a good liquid net worth also enables you to handle any financial crisis like the loss of a job without putting you in a tough situation.


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