Liquid net worth is that amount that comes after doing all payments of your current liabilities and after selling out your liquid assets.
Liquid Net Worth is also known as Liquid Net Assets.
If you find that, what is your liquid net worth then it will be very simple to you to evaluate the financial position of your company.
Let’s say if your liquid net worth is typically low then you may easily understand that your company’s financial position is to seek. On another hand, if you get to see that your liquid net worth is high then you may understand that your company’s financial position is strong.
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How to Calculate liquid net worth?
The calculation of liquid net worth is very simple. The only thing that you have to do is subtract your current liabilities from your liquid assets. If you get confused about what liquid net worth is, then just keep calm and calculate your liquid net worth using the formula.
It will be regularly very simple for you if you get to know the right step to calculate liquid net worth.
Formula to calculate Liquid Net Worth:
Liquid Net Worth = Liquid Assets – Current Liabilities
After getting the formula you need to know what is liquid assets and what is current liabilities. Because without knowing these two terms you won’t be able to calculate your net liquid worth accurately.
What are Liquid Assets?
Liquid assets are those types of assets that are easy to be converted into cash without having any change in their market value. Such as current accounts, banknotes, government bonds, etc.
In a simple understanding, it is the assets that can be converted into cash immediately. According to the time, the valuation of an asset may increase or decrease but the valuation of liquid assets always remains the same.
Some of the investments are also part of liquid assets such as stocks, mutual funds, bonds, money market funds, etc.
For example, suppose Jack is holding a share of $500 in real estate and $1000 in government bonds. Few days after purchasing these shares due to some urgency Jack wants to sell his all shares but he can’t be able to do so.
Because real estate shares are not liquid assets, he may be able to sell his $1000 shares because government bonds are liquid assets and can be converted into cash anytime.
What are Current Liabilities?
Current Liabilities are the debt that should have been to be paid within one year.
Some of the examples of current assets are the account payable, accrued expenses, short-term notes payables, accounts payable, taxes payable, unearned revenues, bank loans, salary etc.
Current liabilities are the financial obligations of the company which have to be settled within a year. The maximum time limit for current liabilities is only one year.
It is used to meet the short-term financial needs of the business. One can get to know that the company has maintained adequate working capital if that particular company can process its current liabilities smoothly.
Sometimes you may see the word other current liabilities. This word refers to those liabilities which have to be cleared in a year and are not mentioned elsewhere.
Current liabilities = Trade Payables + Short Term Loans + Current Part of Long-Term Loans + Prepaid Revenue + Accrued Expenses + Notes Payable + Other Short-Term Debts.
Why is Liquid net worth Important?
If you have a very good net worth but you don’t have a good liquid net worth, then this condition is not good for you.
Let’s understand it with an example: If your net worth is $400,000 but your liquid net worth is only $5000 then you can’t be able to meet your daily requirement easily.
Because in Net Worth there are many things calculated such as your house value, property, cash, bank balance and all. So, the total calculated figure is much higher than your actual income.
On another hand, your net liquid worth is your actual. Because this is your income from which you can be able to convert it in cash and be able to spend it anywhere at any time.
So, maintaining liquid net worth is very important to every person. Because if you can’t be able to maintain your liquid net worth that means you are not capable of meeting your daily requirement on a regular basis.
Net Worth vs Liquid Net Worth
Net worth is something that you get by subtracting all your liabilities from your total assets. Here you have to calculate all your assets that may be liquid assets or long-term assets. The same thing happens in liabilities also. You have to calculate all your liabilities that may be current liabilities or non-current liabilities.
On another hand, liquid net worth deals with only short-term assets as well as liabilities. It gives you more accuracy in your company as compared to net worth.
To get it to understand in a better way you just have to take a look at the below table. From this only you will be able to know the exact difference between net worth and liquid net worth.
|Liquid Net Worth
|Difficult to convert in cash.
|Easy to convert in cash.
|Engagement with assets and liabilities
|Long term as well as short-term assets and liabilities.
|Only engage with short-term assets and liabilities.
|Wider because it deals in the long term.
|Narrow because it deals in the short term.
|Assets – Liabilities
|Liquid Assets – Current Liabilities
How to Increase Liquid Net Worth?
If you calculate your net worth with your liquid net worth, then you will find a huge difference among them. But to meet your daily needs smoothly you must have to increase your Liquid Net Worth. And also, you have to maintain it in good condition.
Because the Liquid Net Worth is the only thing that makes your life more comfortable, and you will be able to meet your daily requirements.
Here are some tips for you. So, that you will be able to increase your liquid net worth.
- Slow your spending habits: The simplest way to increase your liquid net worth is to control your spending habits. But to build the habit of saving you must have good control of yourself. So, for building a saving habit in you, you must follow these simple steps in your life.
- Create a budget: This is a very useful way to know your spending nature. It is a great way from which you will be able to track your expenditure very easily. By making a budget you can easily differentiate what is more important for you and what is not.
- Track your weekly expenditure: After making a budget you don’t have to be careless. Now it’s time to track your weekly expenditure. So that, you will be able to recognize whether you are doing your expenditure according to your planned budget or not.
- Avoid Credit Card: Always try to avoid using your credit card. Yeah, the credit card is too beneficial and trustworthy as you have earned it by creating a good credit score. But the thing is, saving credit cards is not so useful.
Because from the credit card you make some unnecessary expenditure and at the month-end, you get to know about that.
- Pay off your Debt: Debt is something that brings headaches to you. As the debt is that money for which you have to pay interest also. So, just be careful and pay off all your debt at a time to avoid interest on it.
And follow some simple strategies to pay off your debt as fast as possible.
- Consolidate debt: In this way, you have to make a single payment for all your debts. Such as, if you have to pay for a house loan, car loan and a personal loan, then why pay them separately?
Just combine all your debt and do a single payment at once.
- Create your small goals: If you make your goal very big that is very hard to achieve. Then just break your goal into some small parts that make it easy to complete your goal and make you feel better.
For example, if you want to save $60, it will be a little hard to save it in a single time but if you break it in a week, say that $10 in a week will be a little simple for you.
- Choose the “snowball” or “avalanche” method to pay off your debt: These are two terms: snowball and avalanche. In a snowball method, you just have to pay a minimum amount every month to meet your debt amount.
In the avalanche method, you have to pay the highest amount as you can by increasing your savings to meet the debt amount with the interest rate.
- Build the nature of saving: You might be thinking that increment in saving is very tough to do. But you can make it easy by doing some simple steps. If you become able to build the nature of saving you may pay off your debt easily.
Here are some simple and practically tested ideas to increase your savings.
- Create your separate savings account: Don’t merge your salary account to your savings account. Always make your savings account separate from all other accounts. You can use the fund of these accounts as an emergency fund.
- Do your work yourself: Always try to do your work yourself so that you will be able to reduce some unnecessary expenditure from your liquid net worth.
Such as taking your dog to walk, do your gardening work yourself, etc. are the small things for which you are paying unnecessarily.
- Set up automatic payments: Set up automatic payments on some important things. Always try to set up automatic payment for yourself too.
For example, if you get paid in your salary account, set up automatic payment for your own savings account so that the specific amount will be transferred to your savings account automatically without any hustle.
Frequently Asked Questions (FAQ):
What is Liquid Net Worth?
Liquid Net Worth is the value of a fund that comes after deducting Liquid Liabilities from Liquid Assets.
What is the formula to Calculate Liquid Net Worth?
Ans. Liquid Assets – Liquid Liabilities
Is liquid Net Worth and Net Worth is similar?
Obviously not, Liquid Net Worth helps you to meet your short term needs and you can be able to convert it into cash easily. But Net Worth is the fund from which you can’t be able to meet your short-term need, and it is not flexible so you can’t be able to convert it into cash easily.
Which is More Important, Liquid Net Worth or Net Worth?
Both Net Worth as well as Liquid Net Worth plays a very important role. But if you come to meet your financial goal on short notice then only liquid net worth will help you with it. So, in the short run, Liquid Net Worth is more important than Net Worth.
Is liquid net worth included in net worth?
Definitely, Net worth is the wider term, and it includes your every asset and liability in itself. Now it may be current assets or non-current assets, current liabilities or non-current liabilities. So, we can say that liquid net worth is a small part of net worth.
What is the Most Liquid Investment?
As liquid investment includes the item that we can convert it into cash very quickly. But have you ever thought about the most liquid investment? The most liquid investment is nothing but the cash itself because for using it you don’t have to do any effort of selling it. After that, comes saving accounts, Bonds, Certificates of Deposit (Cod), and so on.