Liquid Net Worth Definition and Its Significance – PillarWM
Millionaires and investors with a high or ultra-high net worth have assets worth millions of dollars. However, their net worth does not mean that they have that much money to spend. That is determined by your liquid net worth definition.
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Your liquid assets are what give you the freedom to invest or spend your money as you wish. That being said, many people would prefer some kind of professional guidance in this matter, such as that from a financial advisor. If you have a liquid net worth of more than 10 million dollars, you need a financial advisor who is equipped to deal with your financial requirements. We wrote our Ultimate Guide to help ultra-high net worth investors find the best advisor for them.
Liquid Net Worth Definition
Knowing your liquid net worth can help you make decisions concerning your wealth management. A wealth manager can assist you in this matter. Wealth managers at Pillar Wealth Management can proactively help you with your financial management, asset allocation, and portfolio performance. If you have a net worth of 5 million to 500 million in liquid investable assets, you are the perfect fit for us! We use the best resources, capabilities, and expertise that our professional advisors have to offer to give you expert wealth management services. Contact us today to schedule your first free consultation.
It is understandable to be confused between the financial terms ‘net worth’ and ‘liquid net worth.’ We will begin by explaining whats liquid net worth. As a wealthy individual, you likely have multiple valuable assets distributed across various investments, be it real estate, cash, bonds, vehicles, precious items, stocks, equities, or more.
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If you were to liquidate, i.e., sell off, everything you own right now, the cash that you have on hand would be your liquid net worth. Typically, your liquid net worth will be less than your net worth since transaction costs, fees, and taxes will considerably cut down the amount. This depends more on the urgency of your situation.
If you want to sell your house quickly, you will settle for a deal that pays you less than the real estate market value. The same goes for selling a business. Now, not all your assets are liquid. We will discuss more on liquid and illiquid assets later.
How is Net Worth Different from Liquid Net Worth?
To offer more clarity, we will discuss exactly how your net worth differs from your liquid net worth.
Your net worth is an overview of how much wealth you have. This includes liquid and non-liquid assets, even those that are tied up in long-term investments, real estate, or corporate holdings. So, just because a wealthy individual has a billion-dollar net worth, it does not mean that they can spend that amount freely.
Your liquid net worth is the amount of money you can have access to on short notice. It is the portion of your net worth that is either held in cash or can be easily converted to cash. This is more complicated than just counting stocks and bonds as liquid assets. We’ll talk about this in more detail in the following section. If you want an expert to help you identify your liquid and liquid assets, it is best to contact a financial advisor or wealth manager. Our wealth managers can give you unbiased, fiduciary financial advice, so don’t hesitate to give us a call!
Liquid Assets vs. Non-Liquid Assets
While we have said that your liquid assets are those which can be converted to cash easily, the category contains more than just stocks and bonds. For instance, a house is typically not a liquid asset, but it still has value.
You will need to consider the real estate market, the amount of time it would take to close a sale, the fee and transaction costs, and the inevitable price-haggling that comes with any negotiation. To compensate for these factors, you can apply a percentage discount to your real estate when you include it in your liquid net worth calculation, usually a 15-20% value deduction.
Now, if we discuss whether your 401k account or retirement fund is considered a liquid asset, the answer is similar. Your liquid net worth 401k can be withdrawn prior to your retirement age but will incur a penalty fee and taxes. When you include it in your calculations, you can apply approximately a 30% discount.
The same applies to your Roth IRA. Early withdrawal incurs a 10% penalty and taxes, but if you compensate for that deduction, you can count it in your liquid net worth.
Stocks and bonds are liquid assets as you can liquidate them and have cash in your hand within a few days. Even here, you are liable to taxes on the profit you gained unless you’ve held a stock for more than a year. This would qualify you for a long term capital gains tax, which is a reduced tax rate of 15%. Still, it is better to discount your brokerage portfolio by 5 to 10% to get a reasonably accurate liquid net worth.
Other liquid assets such as cash, savings and checking accounts, and certificates of deposit allow you to withdraw cash directly. Anything that you can sell at a breakeven point would be considered liquid, and even some assets that incur a small amount of loss but still allow you to have cash in your hands.
How Does Your Portfolio Affect Your Liquid Net Worth
Normally, wealthy investors have a diverse asset allocation that allows them to have plenty of liquid and illiquid assets should they ever need it. Investors who work with investment managers or wealth managers have a portfolio that is designed to gain returns and secure their wealth.
Improving your portfolio performance can help you gain more returns, which you can then deposit into liquid assets. Our Performance Guide highlights some strategies that we use to enhance your portfolio’s performance.
How Can You Calculate Liquid Net Worth?
If you want to see how your net worth compares against your liquid net worth, you can find out your total net worth by using the following steps.
First, you need to add up the value of everything you own, all your assets, whether cash, bonds, property etc. Next, you need to add up the cost of any liabilities, debts, or possible value deductions. Subtracting the two values will give you your net worth.
If you’re wondering what liabilities you should consider, we advise that you read our book, The Art of Protecting Ultra-High Net Worth Portfolios and Estates – Strategies For Families Worth $25 Million To $500 Million. It can help you understand the threats that wealthy families might face and how you can protect yourself from them. Usually, liabilities would include any student loans, mortgage payments, credit card balances, and any loans you owe.
How To Calculate Liquid Net Worth
A simple formula will help you find your liquid net worth. It is similar to the formula used to calculate your net worth, with the difference that you need to include discount percentages for some assets.
Liquid net worth = liquid assets – liabilities
You do have the option of excluding your illiquid assets from the calculation altogether. If you do happen to include them, you can follow these value deductions:
• Real Estate: A deduction of 25%
• Vehicles or cars: A deduction of 15%
• 401(k) accounts: A deduction of approximately 25 to 30%
• IRA accounts: An approximate 20% deduction
Your liabilities remain the same as in your net worth calculation, i.e., debts, loans, mortgages etc.
The value you get from this calculation is the amount of cash you will have on hand if you sold everything off. You can avail the assistance of a financial advisor to find out your liquid net worth. If you have more than 10 million dollars’ worth of liquid assets, you’ll need the right financial expert to guide you through the process. Our Ultimate Guide can help you find one.
Liquid Net Worth Example
Liquid net worth = liquid assets – liabilities. Therefore, when you look at a business and its assets, you can easily calculate its liquid net worth.
Make a list of the liquid assets, for example, cash, savings and checking accounts, and stocks and bonds. Suppose their total value is $500,000. Then, list all of the business’s liabilities, such as accounts payable, salaries, mortgages or other loans, and credit card debt. If the total value of the liabilities is $300,000, then the business’s liquid net worth is $200,000.
The Significance of Your Liquid Net Worth
Now that you know whats liquid net worth and how to calculate it, you might want to know why your liquid net worth matters in the first place.
A net worth gives you an idea of how much money you have, but it doesn’t indicate your financial stability or financial freedom. Your liquid net worth does that.
It shows how prepared you are financially to handle emergencies or unforeseen circumstances. It can cover your expenses without you having to sell off any assets below market value. For many people, a high liquid net worth means financial security.
When you have more fluid finances, you have financial freedom. This means you can improve your living standards and achieve a higher financial status. If you have a high liquid net worth, you should still be cautious about how you manage it. That is where wealth managers step in.
Trusting your money to the right expert can enhance your wealth and secure your financial future. However, finding the best financial advisor is no simple task. That is why we prepared a guide to help you know exactly what to look for in any financial advisor you choose.
How To Increase Your Liquid Net Worth
If you’ve done your calculations and are disappointed to find out that your liquid net worth is not as high as you wanted it to be, don’t worry. There are ways you can increase your liquidity and even your net worth. You can consult with one of our expert wealth managers to learn more about this.
Increasing your active income is one way, either through a business venture, new investment opportunities, or finding better employment. Affluent investors know the advantage that a strong investment portfolio can bring. They have optimized portfolios that earn them high rewards at minimal risk. You can also optimize your portfolio for maximum growth by using the five shifts we have highlighted in our guide.
1. Pay off your debt
You can increase your liquid net worth by paying off your debt and avoiding incurring new debt in the future. Having debt does not mean you cannot invest. Consider the interest rate on your loan and compare it to the potential return on a new investment. If the expected return is greater than the interest on the loan, then you could invest more and pay off the loan more slowly.
2. Build up a savings account and emergency fund
Before deciding to invest, you have to build up some liquid assets to be available in an emergency. If everyone in your household who earns a salary were to become unemployed, how much would you need in cash to meet all your household needs for three months? Or six months, if finding new employment could be difficult?
3. Review your expenses
Take another look at your budget (or get on track with creating one). Where could you tighten up your spending to be able to pay off more debt or invest more? Make sure you focus on necessities when you buy, especially if you have debts to pay off.
4. Expand your investment portfolio
Even with small amounts of money, you can build an investment portfolio that you can manage yourself. Check out some online platforms or robo-advisors that charge quite low fees for self-directed investors. Start small and watch your wealth grow.
Knowing the liquid net worth definition is the first step to understanding your financial health. Once you have a clear idea of whats liquid net worth, you can proceed to make your financial objectives according to that. With the assistance of a financial advisor, you can even create a customized financial plan to meet those goals.
Investment managers and wealth managers are experts in maximizing your portfolio’s performance to help you generate more revenue. This, in turn, will improve your liquid net worth. They can use strategies, diverse investment opportunities, and methods that benefit you.
At Pillar Wealth Management, we have more than six decades of experience in helping wealthy investors achieve their financial goals by creating customized plans for them and giving unbiased advice. We cater exclusively to a clientele with a high and ultra-high net worth of 5 million to 500 million in liquid investable assets. You can rest easy knowing that our fiduciary wealth managers have the expertise to manage your wealth and portfolio to optimize it for financial success. Schedule a meeting with us today to get started!
Frequently Asked Questions
Liquid net worth is your net worth (assets less liabilities), then subtracting non-liquid assets, such as real property and hard goods like vehicles.
Take the value of your assets and subtract the value of your non-liquid assets; then subtract the value of your liabilities.
The net fixed asset is the value of the asset after depreciation so fixed net worth is net worth after depreciation.
Hard goods such as cars, real estate, boats, and planes are not liquid assets because they cannot be sold quickly.
According to mint.com, Elon had about $3 billion in cash before buying Twitter.
According to Bloomberg, Bill Gates is the king of cash, with $46.8 billion in cash.
According to Bloomberg, Jeff Bezos has $12.7 billion in cash.
The most liquid assets are cash, money market accounts, and savings and checking accounts.
According to Bloomberg, Bill Gates has about $46 billion in cash.
Bill Gates is the king of cash.
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We enjoy working with high net worth and ultra-high net worth investors and families who want what we call financial serenity – the feeling that comes when you know your finances and the lifestyle you desire have been secured for life, and that you don’t have to do any of the work to manage and maintain it because you hired a trusted advisor to take care of everything.
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