How to Calculate Your Liquid Net Worth
Net worth is calculated by subtracting what you own from what you owe.
The leftover money is your net worth and it helps you understand your overall financial situation. Liquid net worth goes a step further. It tells you if you have enough money to cover a financial emergency, as well as other things.
Especially during an economic downturn, knowing both your net worth and liquid net worth is crucial. They are two measures of your financial health. Here’s how to calculate your liquid net worth (and tips to make it a positive number).
- Liquid net worth is the cash or cash equivalents you have after subtracting your liabilities (aka what you owe).
- It shows you how much of your money is accessible.
- Formula: Total Liquid Assets – Total Liabilities = Liquid Net Worth.
- Total liquid assets are anything that’s cash or can easily be converted into cash, such as money in your checking or savings account.
- Total liabilities are financial obligations you have to pay back (either now or in the future). Think of liabilities like student loans, credit card debt, etc.
- Increase your liquid net worth by paying off high-interest debt, save for an emergency fund, and decrease your living expenses.
What is liquid net worth?
Liquid net worth is the cash or cash equivalents you have after subtracting your liabilities (aka what you owe).
It shows you how much money you have on hand in case of a financial emergency. You know if you can cover expenses or not. You also know if you can afford an investment opportunity. Basically, it’s cash that is accessible to you.
Here are a few examples where knowing your liquid net worth is important:
- The car breaks down, costing you $2,000 in repairs.
- Your dog needs an emergency trip to the vet. $1,000.
- A friend asks if you would like to invest $5,000 in their burrito food truck startup.
Your liquid net worth tells you if you have cash on hand to easily afford these things. For example, if you have a negative net worth of -$10,000, it would be difficult to cover costs without going into more debt.
Liquid net worth also gives you a good idea if you can achieve specific short-term and long-term financial goals.
Hint: Sign up for the Core Four of Personal Finance, including Recession Basics course on Udemy and access a free spreadsheet to calculate your net worth.
How to Calculate Liquid Net Worth
The formula for net worth is Total Assets – Total Liabilities. The formula for liquid net worth is almost exactly the same, except you look at your total liquid assets:
Total Liquid Assets – Total Liabilities = Liquid Net Worth
Here’s how to calculate your own liquid net worth:
Step 1: Calculate your total liquid assets
Total liquid assets are anything that’s cash or can easily be converted into cash. Here’s a list of liquid assets you should track:
- Money market accounts
- Certificates of deposit (CDs)
- Checking account
- Savings account
- Stocks & bonds
Remember that the list should be anything that can quickly be converted into cash. Non-liquid assets that you wouldn’t include on this list would be things like property you own, cars, retirement accounts (e.g. Roth IRA or 401K), etc.
A home, for example, could be converted into cash if you sold it, BUT this process could take a long time to complete. You wouldn’t have the cash on hand very quickly. Same scenario with a car. These items are part of calculating your overall net worth, but not liquid net worth.
Write down everything you have in liquid assets and the dollar amounts for each (it can help to perform this step within a Google Sheet). Calculate the total.
Step 2: Calculate your total liabilities
A liability is a financial obligation you have to pay back (either now or in the future). So what are personal liabilities? Liabilities include things like
- Student loan debt
- Credit card debt
- Medical debt
- Car loan
- Payday loans
Basically, your liabilities are any debt that you have. Although not all debt is bad, you don’t want your liabilities to significantly exceed your assets (or hurt your ability to reach your financial goals).
As with your assets, write down all of your liabilities and the dollar amounts. Add up the total.
Step 3: Subtract your liabilities from your liquid assets
With your numbers in hand, subtract your total liabilities from your liquid assets. The leftover number is your liquid net worth.
Let’s look at this process in action. Say that you are 27-years-old and have been working professionally for four years. You have the following in total liquid assets and total liabilities:
Total Liquid Assets:
- Cash = $500
- Checking account = $5,000
- Savings account = $10,000
- Student loan debt = $10,000
- Credit card debt = $2,000
- Medical debt = $500
Apply the liquid net worth formula: $15,500 – $12,500 = $3,000
According to this example, you have a liquid net worth of $3,000. As you pay off your debt and increase your assets, your liquid net worth will increase. Fun fact: the average liquid net worth for someone below the age of 35 is $3K.
Go through these steps to calculate your liquid net worth.
How to increase your liquid net worth
So, what if you have a negative liquid net worth? Maybe it’s a number where you couldn’t cover a financial emergency if you needed to. Or you find that there’s no money left over for investment opportunities.
Here are a few ways to make your liquid net worth positive:
Pay off your high-interest debt
Pay off high-interest debt like credit cards first. This is typically debt with interest rates of 15% or higher. High-interest debt decreases your liquid net worth and means you have less money to save.
At No BS Investing, we recommend following the avalanche method to get out of debt. This is where you tally up all your debt – from student loans to credit cards. Next, pay more on debt with the highest interest rate. At the same time, make minimum payments on your other debt.
Once your first high-interest debt is paid off, start making extra payments on the debt with the next highest interest rate. Keep going until all your debt is paid off.
Related: How to Pay Off Debt Quickly
Save for your emergency fund
An emergency fund is a stash of money (typically in a savings account) that ensures you have accessible cash in case of an emergency. Experts typically agree that you need at least 3-6 months’ worth of living expenses saved up to have a proper emergency fund.
This amount looks different for different people. Here’s how to calculate the right emergency fund amount for you.
To make saving easy, set automatic saving deductions. An automatic savings deduction is where money is automatically withdrawn from your paycheck (usually every month). You should be able to set up this deduction with your bank.
Direct money to a savings account where you can easily access it if needed for an emergency. For example, you might set it up where $200 is automatically contributed to your savings account each month. If a financial emergency pops up, the money is ready and waiting.
Decrease your living expenses
Ensure your living expenses are low enough to hit your financial goals. We recommend focusing on decreasing housing and transportation costs.
According to the Bureau of Labor Statistics, housing and transportation make up around half of the average American’s household spending. These expenses make it difficult to get out of debt and save (and decreases your liquid net worth!).
Don’t rent or buy a home that you can’t afford. Instead, consider living with roommates or in a studio apartment to decrease your housing costs.
Apply the same concept to transportation. Avoid purchasing a luxury vehicle (the fees and payments add up over time!). Instead, select vehicles that offer bang for their buck.
Use the money you would have spent on housing and transportation to get out of debt and build up your savings.
Related: 3 Steps to Avoid Lifestyle Inflation
Calculating your liquid net worth
Knowing your overall net worth is important. But it doesn’t tell you what money you have accessible for emergencies and more. Your liquid net worth gives you a clear picture of what cash you have on hand and if you’re improving your financial security.
Want to learn more about personal finance and calculating your net worth? Take the Core Four of Personal Finance, including Recession Basics course on Udemy. This course teaches you how to effectively manage your money — even during tough economic times! Check out the course here.