Liquid net worth is a term that refers to the value of an individual’s assets that can be quickly converted into cash. It is important to note that not all assets are liquid, and some may take longer to convert than others. For example, real estate typically takes longer to sell than stocks or bonds.
Individuals with high liquid net worths are typically considered to be financially secure and have a cushion to fall back on in case of an emergency. On the other hand, those with low liquid net worths may find themselves in a tight spot if they encounter unexpected expenses.
Building up liquid net worth is often one of the goals of financial planning. By diversifying one’s assets and having a mix of both liquid and illiquid assets, individuals can protect themselves against financial shocks.
For example, if the stock market crashes, those with a large amount of cash on hand will be less affected than those who have most of their wealth tied up in investments.
How to measure liquid net worth?
There are a few different ways to measure liquid net worth. One popular method is to use the rule of thumb that liquid assets should make up at least three to six months’ worth of living expenses. This ensures that individuals have enough cash on hand to cover their basic needs in case of a job loss or other financial setback.
Another way to measure liquid net worth is by looking at the ratio of liquid assets to total liabilities. This ratio is sometimes referred to as the “debt-to-liquidity ratio.” A higher ratio indicates that an individual has more liquid assets than debt, which is generally considered to be a good thing.
For those who are trying to build up their liquid net worth, there are a few different strategies that can be used. One is to invest in assets that can be easily converted to cash, such as stocks, bonds, and mutual funds. Another is to keep some money in a savings account or money market fund so that it is readily available if needed.
Building up liquid net worth can take time, but it is typically worth the effort for those who want to be financially secure. By having a mix of liquid and illiquid assets, individuals can protect themselves against unexpected financial shocks and have a cushion to fall back on in case of an emergency.