Net Worth vs. Liquid Net Worth: Definitions and Differences
Updated June 24, 2022
What is net worth?
Net worth is the monetary amount by which an entity's assets exceed its liabilities. You can calculate the net worth of an individual, company, sector or country to better understand their financial situation. For example, when a company has a high net worth, that suggests a healthy financial standing. Similarly, when a country has a high net worth, it suggests a healthy long-term economy. When calculating the net worth of an individual, you may label those with high net worth "high-net-worth individuals" (HNWI). Net worth for a business is also known as book value or shareholders' equity.To calculate an individual's net worth, you can add together the value of all their assets, then subtract the value of any liabilities that they owe. Assets might include cash, investments, inventory, bank accounts, brokerage accounts, retirement funds and real estate. Assets can also be valuable physical items like jewelry or gold. A company might own physical assets like office equipment, machinery or a company car. Liabilities include taxes or wages that an individual or company may owe. They can also include bank debt and mortgage debt.Read more: Average Monthly Income vs. Net Worth: What's the Difference?What is liquid net worth?
Liquid net worth is the monetary amount by which an entity's liquid assets exceed its liabilities. A liquid asset is cash or an asset that you can convert into cash quickly. Cash that you store in a checking account or savings account is also a liquid asset. Other examples of liquid assets include money market assets and inventory assets. Certain investments, like stocks, bonds, mutual funds, exchange-traded funds (ETFs), are also liquid assets because you can sell them quickly in return for cash. Both individuals and companies may hold liquid assets.Nonliquid assets might include physical objects like jewelry, precious metals, cars or art. To convert these items into cash, the owner first needs to find a buyer, negotiate a price and make the sale. Money in a retirement fund or a trust that's only accessible when you reach a certain age are also examples of nonliquid assets. For some savings accounts of this type, there may be financial drawbacks to withdrawing cash from the account early to dissuade individuals from doing so.Read more: A Guide to Liquidity (With Definitions, Distinctions, Formulas and Examples)Showcase your skills with help from a resume expert
Differences between net worth vs. liquid net worth
While net worth and liquid net worth are very similar, there are a few key differences that set these financial terms apart. Understanding the difference between them may help you better understand or explain your financial situation or the financial situation of an entity of interest. Here are a few important distinctions to understand:Net worth assets vs. liquid net worth assets
The assets you include when determining net worth or liquid net worth are one of the key distinguishing features between the two financial metrics. When calculating net worth, you include all assets regardless of their form. When calculating liquid net worth, you include only liquid assets, as defined above. This means that the liquid net worth of most individuals may be significantly lower than their total net worth.If you'd like to include certain nonliquid assets when calculating your liquid net worth, you may add 80% of their true value to your assets. It's challenging to know exactly how much a nonliquid asset is worth because of variables like transaction fees and the final price a buyer might negotiate. Undervaluing that asset by 20% can help offset the unknown elements.Read more: Calculating Net Income for Businesses and Individuals (With Formulas)Purpose of the calculation
The purpose of calculating net worth versus liquid net worth is another distinguishing factor. While both can help you learn more about the financial situation of a person, company or institution, calculating net worth can provide a broad understanding of a financial situation to which liquid net worth can add detail.For example, calculating liquid net worth can be a helpful way to determine how much money you've immediate access to, which might help you understand your financial situation from a different perspective. It can also help you prepare for emergencies by ensuring that you have an appropriate amount of money available for immediate use.Increasing net worth vs. liquid net worth
Some strategies for increasing net worth and liquid net worth are the same, while others are unique to liquid net worth. For example, you can increase your liquid net worth without changing your overall net worth by selling physical items for cash. Alternatively, strategies like paying off debt can increase both your net worth and your liquid net worth. You can do this by paying short-term liabilities like student loans, credit card bills and car loans. This can help you decrease your liabilities, which improves your asset to liability ratio.You can also increase your overall net worth and your liquid net worth by saving money or increasing your income. To save money, you might create and follow a strict monthly budget. Consider allowing 60% of your monthly budget to living expenses, 20% to savings and 20% to other desires. To increase your income, you might ask for a raise at work, find a higher-paying job or take on freelance work in your field. You can also make extra money by renting out a room in your house or offering services like babysitting or dog walking to friends.
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