Liquid net worth is a topic that comes up when establishing new banking relationships, especially in private banking.
If you’re trying to navigate opening US bank accounts for non-residents, the variables that go into calculating your liquid net worth can be confusing.
In this article, we’re going to share everything you need to know about this topic, along with answers to common questions we receive from foreigners getting started in the US.
Feel free to use the table of contents to jump ahead to the sections most relevant to you.
Table of Contents
- Liquid Net Worth
- Examples of Liquid Net Worth
- Net Worth vs Liquid Net Worth
- How Do I Calculate My Financial Liquid Net Worth?
- Frequently Asked Questions
- Ready to Open Accounts With Banks in the USA?
Liquid Net Worth
Liquid net worth refers to the total value of your cash and liquid assets (assets that can be converted into cash without losing value) minus your total liabilities.
In other words, the importance of liquid net worth is that it reflects a person’s ability to meet financial obligations and goals.
Depending on where you are located, accounting principles may restrict whether certain financial products or tools are included while instruments like IDRs are almost always part of your liquid assets.
Not surprisingly, many people look to calculate liquid net worth as a measure of how their assets are growing in comparison to their liabilities. And, while liquid net worth and emergency funds are important to short-term financial interruptions, they are not the only consideration.
In other words, liquid net worth and financial stability in the long term, are two different things. For example, someone with a positive net worth may not be building financial stability long-term because they are avoiding growing their asset base in real estate and retirement accounts.
So, while building a positive liquid net worth is important, it’s also important to remember that a person’s financial liquidity and net worth are two different things. Net worth includes both long-term assets that are built over time with credit, while financial liquidity boils down to cash that you can access in the short term.
In the following sections of the article, we will discuss liquid assets vs. liabilities and liquid vs. overall worth. We will also dig into the importance of liquid net worth in personal finance.
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Examples of Liquid Net Worth
Examples of liquid assets include any physical cash, cash held in bank accounts, listed securities (stocks, bonds, ETFs), money market funds, mutual funds, certificates of deposits, treasury bills, and certain cryptocurrencies like Bitcoin.
Cash
The most obvious example of a liquid asset is cash. Cash is readily available to the owner for use at any moment, whether it is physically held or held with a financial institution.
Financial Bank Accounts
Bank accounts and other financial accounts are the second most obvious liquid asset. Funds held in bank accounts can easily be accessed by the owner immediately, to help offset short-term financial requirements.
Money Market Accounts
Money market accounts are another form of asset that is included in your liquid assets. This is because, even though money market accounts offer better interest rates than normal bank accounts, the funds are still easily accessible to the owner.
Net Worth vs Liquid Net Worth
The main difference between net worth and liquid net worth is that net worth is the sum of all your assets minus your liabilities while liquid net worth only includes the sum of your cash and liquid assets minus liabilities. In other words, liquid assets are part of your total worth, but it only includes those assets that you can quickly turn into cash.
How Do I Calculate My Financial Liquid Net Worth?
You can calculate your liquid net worth by calculating the total value of your liquid assets, and the total value of your liabilities, and then subtracting your total liabilities from your total liquid assets. If you have more assets than liabilities, you will have a positive outcome. If you have more liabilities than liquid assets, you will have a negative outcome.
Again, it’s important to note that liquid net only includes assets that are held in cash (e.g. bank accounts) and those assets that can be easily converted into cash (e.g. listed securities). It does not include assets that have long sales processes (e.g. real estate) or that lose value when sold quickly (e.g. 401k and retirement accounts).
Liabilities vs Liquid Assets
The main difference between liabilities and liquid assets is that liabilities refer to financial obligations you owe to another party while liquid assets refer to cash and other assets that can easily be converted into cash that you own personally. In other words, you owe liabilities and you own liquid assets.
Frequently Asked Questions
Below are four of the most common questions we receive from people looking into the topic. If you have further questions you would like to ask our team, don’t hesitate to get in touch.
What Is Considered Liquid Net Worth?
Liquid net worth is the combined value of two assets, which are (1) cash and (2) assets that can easily convert into cash with limited loss in value. In other words, things you can sell in the short term without needing to dramatically reduce the price. Examples of assets that fall into this category include cash in bank accounts, money market funds, bonds, stocks, and other investments you can easily sell.
Can Net Worth Be Negative?
Yes, it is entirely possible for net worth to be negative. This can happen when the total value of your liabilities is higher than the value of your assets. For example, you have more in debt (mortgage, loans, credit cards) than you do in investments. In this example, you would have a negative net worth.
What Does It Mean If I Have a Negative Liquid Net Worth?
If you have a negative liquid net worth it means that the total value of your liquid assets is lower in value than your debts. In other words, the total amount of cash and cash-like investments that you have is lower than the total amount of money you owe creditors.
Does 401K Count as Liquid Net Worth?
No, your 401k isn’t typically part of your liquid assets. The reason for this is that liquid refers to the total value of assets that are easily convertible into cash. Of course, liquid worth also includes any assets already held in cash. So, since a 401k incurs significant penalties and taxes if you access it before retirement, it does not count.
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