Do You Know Your Liquid Net Worth?

Most people have no idea what their liquid net worth is. That’s because, even though a majority of working adults can tell you, to the penny, how much they take home in each paycheck. Liquid net worth is not something you can quickly deduce based on take-home pay or annual salary. And, finding out what it is, is not just a senseless mathematical trick.

Liquid net worth is an important numerical measure of your lifestyle in several important ways. First, it’s a good predictor of your long-term financial health, especially when coupled with demographic data like age and where you reside. Second, the number is used by many lenders as a way to decide whether you have the means to make payments on a long-term obligation, like the purchase of a home or business. Here’s how to figure your liquid net worth, based on a hypothetical, but realistic, example.

Add It All Up

Liquid net worth is different from net worth because it omits items that you cannot readily convert into cash, like a home, or a long-term investment. But it does include cash and near-cash items like savings account, checking accounts, amounts owed to you, mutual funds, precious metals, bonds, stocks, and money market accounts. To arrive at bottom-line, subtract out all your liabilities, like credit card debts, mortgages, student loans, taxes owed, and car loans. 

If you are looking to get ahead on potential liabilities, like student loans for example, consider business ideas for college students and start making your own money while still attending college. Having available funds to dedicate towards large debts like student loans can positively impact your eventual bottom line. Even small lump sum payments will help reduce debt totals as well as improve your credit score. 

Add In Proceeds from a Life Settlement on a Term Insurance Policy

This category includes the cash surrender value of life insurance policies as well as the amounts you could get through a life settlement on a term policy. For example, many people use life settlements in order to access funds when facing debt, or to cover other kinds of emergency expenses. Because term policies are a potential source of cash, you need to add the amount into your liquid net worth. If you aren’t sure how to estimate the cash value of your policy, and what you could get out it via a life settlement, learn more by reviewing an online guide on how to sell a term insurance policy. For the sake of the example, we’ll assume a term policy that is worth $25,000 when sold in a life settlement.

Other Assets

Assume our example subject has the following liquid assets in addition to the term policy’s life settlement amount:

  • Cash: $4,000
  • Stocks/Bonds: $32,000
  • Savings account: $20,000
  • Checking account: $1,500
  • Mutual fund: $12,000
  • Money-market account: $3,000

The total of this category is $72,500. 

Now, we will subtract all the obligations to arrive at our liability’s category grand total.

  • Credit card debt: $650
  • Mortgage: $55,000
  • Tax owed: $0
  • Student loan: $2,000
  • Car loan: $6,000

The total of this category: $63,650

Putting Everything Together

At this point, some people ask about the equity in their home. Equity is not considered liquid but what you still owe on your home is considered an immediate obligation and thus is counted as a negative factor when computing liquid net worth. Here’s the final data:

  • Liquid assets: Term insurance policy value: $25,000, Other assets: $72,500, Total liquid assets: $97,500
  • Liabilities: Total: $63,650
  • Liquid Net Worth of this individual: $97,500 minus $63,650 = $33,850

 

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