Annual income vs liquid net worth how to#
Annual income vs liquid net worth full#

Perhaps you decide to start a new business, and you need to come up with more capital than anyone will lend you. This is what you might be forced to do if it’s the only way to save your kid’s life, for example.įor the former question, assume a less dire situation. You empty all your financial accounts, including retirement accounts, sell your house and cars, surrender your permanent life insurance policy… well, you get the idea. If my financial sky started falling, what’s the worst-case scenario I could still survive?įor the latter question, you must assume that everything’s fair game.What’s the largest expense I could cover in the short term?.Liquid net worth, however, tells you two crucial things. The plain-vanilla net worth number is useful mostly in tracking your financial progress through life – if it goes up, you’re doing well. Other asset types have to be discounted, at least partially, as we’ll see below.īut first, why should you even care about what might seem like such a nit-picking difference? Why You Should Care About Your Liquid Net Worth

Annual income vs liquid net worth full#

Liquid net worth is the difference between what you could quickly get for your assets and what you owe.įor your most liquid assets, such as cash and balances in your checking and savings accounts, the quickly accessible value and the full value are the same. That’s why they invented the term “liquid net worth.” What is Liquid Net Worth? This is because they’d take time to sell and/or because selling them would cost money (e.g., realtor commissions for selling a home, taxes on capital gains, penalties for early withdrawals from tax-deferred accounts, etc.), and/or because selling in a hurry would require you to lower your asking price (remember that car I mentioned above?). The problem with many of the “own” items is that if you had to come up with money in a hurry, they wouldn’t be available. The “owe” part includes liabilities you’ve taken on, including balances owed on the following:

The valuation of your business(es), assuming you can sell them.

Cash value of any life insurance policies.

held in Roth accounts ( Roth IRAs or Roth 401(k)s)

Stocks, bonds, mutual funds, ETFs, etc.

Money in your checking and savings accounts.

The “own” part includes any asset worth money. As I alluded to above, net worth is simply the difference between what you own and what you owe. How do you capture that fragility, or in a better situation, the relative stability?Įnter “liquid net worth.” Image Credit: Depositphotos.īefore we can define liquid net worth, we need to understand the more generic net worth. If an emergency came up and I needed money, I’d be hard-pressed to sell my car immediately, and even if I managed it, I’d probably have had to lower its price significantly. That’s because part of my nominal net worth was tied up in a used car for which I’d paid $8,000. Negative $4,000 to be precise.īut in reality, my finances were even more fragile than that sad number. In personal finance terms, I had a negative net worth. I came to this country owing more than I owned.

Annual income vs liquid net worth how to#

Learn the definition of liquid net worth, how to calculate your liquid net worth and why it’s a useful number to know.