Net Worth Vs. Liquidity
You should know what you are worth every year. This means taking stock of what you own and what you owe and making sure you grow with each evaluation. However, simply knowing your net worth does not tell you how much liquidity you have, or how much cash you could raise in an emergency. If much of your net worth cannot be converted to cash quickly, you may want to re-evaluate the way you have distributed your investments.
Your total assets include everything you own that has value. This includes houses, cars, property, investment accounts, jewelry, furniture and interest in a business. Anything of value counts. With some items, such as jewelry, you may have to rely on appraisals or estimates. You can count any appreciation in value you have on real estate and other property. You also should subtract any depreciation in value.
Liabilities include any money you owe. Add up the value of all loans. Include credit card debt. You do not have to include future interest, just use the current payoff balances. The sum of your outstanding debt makes up your total liabilities figure.
The “net” in the term “net worth” indicates you must subtract your liabilities from your assets. The resulting figure is your net worth. This figure can be helpful when borrowing money, determining how much insurance protection you need, or when making out a will.
Liquid assets include only those items you could convert to cash quickly without taking a substantial loss. This includes actual cash in the bank, as well as stocks, bonds, CDs and savings accounts. It does not include retirement accounts, because these would charge a substantial penalty if you withdraw the funds in an emergency.
Percentage of Liquid Assets toTotal Assets
Once you know your total liquid assets, compare them to your total assets. No guidelines exist for what percentage of your money should be in liquid assets, so you have to decide based on your personal situation. You can arrive at a percentage by dividing liquid assets by total assets and multiplying by 100. The resulting figure tells you the percentage of your worth that could be converted to cash quickly.
Total Dollars Method
You can list a dollar total for liquid assets instead of figuring a percentage. This figure can be more useful than a percentage because it lets you compare total dollars of liquid assets to total dollars of outstanding debt. This lets you know whether you could pay off all of your debt by cashing in your liquid assets.
Kevin Johnston writes for Ameriprise Financial, the Rutgers University MBA Program and Evan Carmichael. He has written about business, marketing, finance, sales and investing for publications such as "The New York Daily News," "Business Age" and "Nation's Business." He is an instructional designer with credits for companies such as ADP, Standard and Poor's and Bank of America.