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Liquid Net Worth: What It Is And Why It Matters

Cathie Ericson7-minute read
August 13, 2021

How much are you personally worth right now? The question can be answered many ways depending on what assets you count, but the key to financial freedom in your personal financial life is knowing your liquid net worth – that is, how much money you have in “liquid” assets.

Go ahead and pour yourself a glass of something cool to wash down all this information on liquid net worth.

What Is Liquid Net Worth?

Liquid net worth is the value of your liquid assets – the assets you have that can be converted to cash today – minus your liabilities.

While many people consider their estate’s “net worth,” the word liquid is the operable term here. Liquid net worth is the amount of money you can access quickly, making it different from net worth, which is your entire estate.

Liquid net worth is an even more important indicator of financial stability than total net worth, because it’s literally the money you could have in hand today, should you need it. That gives you the financial freedom to handle unexpected situations, like a big medical bill or sudden travel.

Liquid Net Worth Calculator

Wondering what your liquid net worth is? It’s actually relatively easy to calculate. The basic formula is:

Liquid assets minus liabilities = liquid net worth

Remember, your liquid net worth does not take into account real estate, retirement accounts, stock accounts (like an IRA or mutual funds), or even your car, because those aren’t cash options that you can easily tap right now.

The key to calculating your liquid net worth is to only include those assets that you would be able to sell for cash today in order to meet any unplanned expenses or obligations.  

Here’s how it works.

First write out your liquid assets, which may include:

  • Checking accounts
  • Savings accounts
  • Money market accounts
  • Certificates of deposit
  • Jewelry or collectibles
  • Others

Add them up. Then subtract your liabilities:

  • Mortgages
  • Credit card debt
  • Personal loans
  • Student loans
  • Car loans
  • Other 

The remainder will be your liquid net worth.

A Look At Liquid Net Worth Versus Total Net Worth

Let’s say that your mom is gravely ill and lives far away. You need to go be with her, which entails taking a hiatus from your job, flying across the country and paying for your living expenses while you’re there. Instead of putting those bills on your credit card, you’ll want to pay for them upfront, which you can do if your liquid net worth is strong.

So you might start looking at all the places where your assets are located, such as your house, your car, your emergency savings account, etc. But then think about which ones you could liquidate today to get that money for a plane ticket and rent for a short-term apartment. You’d immediately think of your emergency savings and unrestricted stock accounts or mutual funds, not your car or house which wouldn’t be easy to immediately sell. That’s where your liquid net worth comes in and why it’s important to keep a certain percentage of your savings available for if and when you need it.

The Importance Of Liquid Net Worth

As you can see, it’s vital to have the ability to get your hands on funds quickly in the event you face an emergency or unexpected situation where you have to liquidate assets to cover a major expense.

Your non-liquid assets – in other words, the ones you can’t cash in on today – simply wouldn’t help you in this type of situation. That’s because if all your money is in “restricted accounts,” such as retirement accounts, 529 accounts and other long-term savings vehicles, you would have to pay a penalty if you sold them today.

How To Improve Your Liquid Net Worth

We should have warned you that you might be surprised by how low your liquid net worth might appear, especially if you’ve been diligently saving for the long term by buying rental properties or socking money away in your 401(k) account.

In fact, you might be shocked at how much lower it is than your total net worth. And while both types of net worth are important, as you can see, there are benefits to being able to access funds quickly should you need to. Consider this motivation to make some improvements. Here are some ways you can improve your liquid net worth.

Slow Your Spending

The best way to increase your saving is to decrease your spending. There are a number of practical ways you can do that, some of which may be less painful than you expect. Here are three steps to take:

  • Create a budget: The only way to know how much you can spend is by first knowing where your money goes. As you work to increase your liquid net worth, it’s a great time to figure out where your money is going each month. Track your spending carefully, then figure out how much you’re spending on both essentials and nonessentials and see where you can cut. Creating a budget will help you see how much you can spend on clothing or takeout, for example, while making sure you’re also contributing to goals like emergency savings, retirement savings, and even a down payment or vacation fund.

  • Make a weekly spending budget: Once you have your overall budget, figure out how much you can spend each week on nonessentials. Knowing that you can go to dinner or buy a new pair of shoes (but not both!) will help you make more judicious choices throughout the week. And you might decide not to do either, and then allocate that money to a vacation fund or toward a bigger splurge at the end of the month.

  • Pay with cash: It’s all too easy to charge items throughout the month and then be faced with a surprising total when the bills come due. That’s where you want to refer to your budget to see how much you should be spending on each line item and take steps to make sure you don’t exceed it. For example, if you have allocated $100 a week for groceries, put that money into cash and carry it in a special envelope. Once the money is gone, you’re done spending on groceries for the week.

Pay Off Debt

Debt can weigh you down in many ways. It can torpedo your budget because you’ll end up spending even more money in interest charges, and the mental energy of knowing these bills are waiting for you can be exhausting. That’s why chipping away at debts with the goal of paying them off is a great strategy. Here are three practical ways to pay off debt fast:

  • Consolidate debt: Sometimes the sheer abundance of bills can be overwhelming. Consolidating debt by rolling all your payments into one vehicle, like a personal loan, can make it more manageable. It means that you'll only have one bill to pay each month, rather than multiple ones, and it usually comes with a set payback period which means there is a light at the end of the tunnel.

  • Create micro goals: A huge sum might look impossible to pay off, but you’ll be surprised how much better you feel when you start making progress. Take a look at your budget and find one place where you can conserve and vow to contribute that amount to your debt. For example, if you decide to stop ordering takeout, you can save at least $50 a week. Over a month that adds up fast to make a nice dent in a bill that otherwise might look unmanageable.

  • Choose the “snowball” or “avalanche” method: These are fun terms to describe two different methods for paying off debt. In the first one, the snowball method, you make minimum payments on all your debts and then pay as much as you can afford to your smallest bill. That means that soon you will pay it all off and not have to think about that particular bill again. In the avalanche method, you do the same in paying minimums on everything, but then you chip away at your bill that has the highest interest rate to get rid of that one first.

Increase Your Savings

It might seem impossible to increase your savings, especially if you’re dealing with bills and debt, but it can be easier than you think. Here are a few practical ways to save money and build up that savings each month.

  • Open a separate savings account: Having money sitting in your checking account makes it much easier to spend. When you have a separate account, you won’t see that sum accumulate, making it much less likely you’ll be tempted to tap it. You can even have multiple savings accounts, for things like your emergency fund, a down payment fund, and a vacation fund. While the emergency fund will directly increase your liquid net worth, saving for other big-ticket items rather than putting them on your credit card means that you’re less likely to be taking on the debt that hurts your net worth in the long run.

  • Start a side hustle: A good way to save more money is to make more money. And while a raise or new job might not be in the cards, joining the gig economy will let you make more money relatively easily. You might decide to walk dogs, deliver groceries, or tutor or babysit kids. Or you can make a nice sum just by cleaning out your closet and cupboards and selling excess items on one of the many resale platforms available. Then direct all the money you make toward your savings and watch your liquid net worth grow.

  • Set up automatic payments: You’ve heard the expression “pay yourself first.” That’s easier to do when the money never hits your paycheck at all. Talk to your human resources department or even your bank about setting up a system where a portion of your money goes directly to an account, rather than into your paycheck or direct deposit. Out of sight is truly out of mind, and it will help bolster your savings and thus your liquid net worth.

The Bottom Line On Liquid Net Worth

It’s vital to know your net worth, but it’s equally important to separate your liquid net worth, as that’s the number that counts in your day-to-day life. It allows you to react to emergencies or unexpected expenses, without sacrificing your personal financial wellness by taking on debt.

Wondering how you can get started growing your liquid net worth? Create a Rocket Account1 today to help build your financial future and put you on the path to financial freedom.

1Rocket Account is your account created in connection with Rocket Mortgage®, Rocket Loans®, Rocket HomesSM or Rocket HQSM. Rocket Mortgage®, Rocket Homes Real Estate LLC, Rocket Loans® and Rocket HQSM are separate operating subsidiaries of Rock Holdings Inc. Each company is a separate legal entity operated and managed through its own management and governance structure as required by its state of incorporation, and applicable legal and regulatory requirements.”

Cathie Ericson

Cathie Ericson writes about personal finance, real estate, small business, education, retail/ecommerce and other topics for a host of brands and websites. Her work has been featured on major media websites, including U.S. News & World Report, Forbes, Business Insider, The Oregonian, Industry Dive, Boston Globe, CNBC, MSN.com, Realtor.com and Yahoo Finance, among many others. Find her @CathieEricson.com.