You’ll want to make sure your liquid assets will cover you. The importance of this knowledge comes into play if an emergency situation pops up. Liquid net worth is pertinent because it allows you to plan for the “what ifs” of life. RELATED READING: Questions you MUST ask when considering a financial advisor So you are probably losing 25-30% of something’s value if you need to liquidate your life quickly. Most likely, this number is only 70% of your actual net worth, or your assets minus liabilities. So, again, that’s another 20% discount, leaving me with only 60-70% of the total purchase value of my tractor.īasically, when you calculate all these discounts and a series of “afters,” you’re left with your total liquid net worth. However, in reality, I may only be able to get around $14k for it. (Have I mentioned that I REALLY LOVE my tractor?) Let’s say I paid $20,000 for my tractor, but today, it’s book value is $18,000. Other hard assets you may want to factor in: cars, boats, or maybe even a tractor. So basically, you’ll need to discount direct investments, illiquid investments, and hard assets to about 50-60% of their actual value. If your house appraises for $100,000, a smart investor will snatch it up quickly at $75,000. If you sell a piece of property in most markets-outside the bubble of L.A.-you’ll likely need to discount it by about 20-25% if you want to sell quickly. If the company is valued (how much someone would pay for it) at $5,000, but you need to sell it quickly, you’ll probably get about $2,000 for it.Īdditionally, let’s look at real estate. One example would be the amount of interest in your business. In other words, they are very hard to sell. These are usually non-liquid investments. RELATED READING: Ways to avoid the IRS’s 59.5 early retirement penaltyĪnother type of investment to consider in calculating your liquid net worth is your direct investments. While that $50k factors directly into your net worth, you will need to make it liquid in order to include it into your liquid net worth, meaning you’ll be adding closer to $25k to your amount. Remember this specific example is for people under age 59 1/2, so cashing it out means you owe a pre-payment penalty too. If you have a state income tax as well, factor in another 5-10%. For this example, we’ll use a tax rate of 20-30%. If you cash in the account, you’ll be forced to pay income taxes. Let’s say you have a retirement account such as a 401k, with $50,000 sitting in it, and you’re under the age of 59 1/2. Now, here’s where the determination gets tricky. Those are worth whatever the market value is as of today. Simple enough, right? Now factor in taxable investment accounts. Would you have the answer if your financial advisor asked? Beyond the Definition – Actually Calculating Liquid Net Worth: You have probably never taken the time to figure it all up. The concept works like this… if you had to sell everything you own today, how much cash would readily be available? The Simple Definition of Liquid Net Worth: Is it all the cash I have?” The funny thing is, most people actually believe that liquid net worth is the amount of money in their savings account. In the strategy meeting with the client, I asked him: “What is your liquid net worth?” He looked dumbfounded, replying, “I don’t even know what that is, much less how to calculate it. You really should know why liquid net worth matters and how to determine yours. However, both calculations have their place in your finances. I know liquid net worth doesn’t garner the attention that net worth does. For instance, I recently met with one of our wealth management clients and the topic of liquid net worth came up. It cuts across various aspects of our lives and, at certain times, it can knock the wind right out of us. Personal Finance for Business Owner Podcast Indexįinance is a multifaceted subject.Your Baby’s Ugly – Growing Business Value.Personal Finance for Business Owners Series.
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