Welcome to a new personal finance term. Its likely you’ve heard of liquid net worth – the value of all assets that can readily be turned into cash. That would exclude things like real estate and ownership in private companies. To not confuse liquid net worth with my definition, I’m calling it just liquid worth. What makes up my liquid worth? Liquid worth is the sum of all cash I can have in hand within 5 days. I don’t subtract any debts (like a car payment) because I may not need to pay it in the next 5 days.
Look at it this way, have you ever seen a movie where a kid is held hostage for $1 million and the dad is wealthy enough to put the cash in a briefcase in a few minutes? So, how much cash can I get on short notice without taking out a loan? And where do I get this cash?
I calculate my liquid worth based on all cash and equivalent accounts. For me, this is a checking and savings at my local bank, as well as two savings accounts with ING Direct. It doesn’t stop there though. I have a credit card with cash advance, and a credit line. Of course this has to be paid back, but not in 5 days. It is also a line of credit, but not a new loan. I also have a brokerage account with Sharebuilder, stocks can be sold in minutes and the money in my pocket in a day. So my liquid worth includes: 4 bank accounts, 1 credit card and 1 brokerage account.
What does this mean and what is its value?
No matter what you plan for, especially at my young age, there’s always something that comes up. Emergency funds are the foundation of liquid worth, but its good to take stock of what you have in addition to that fund. I track my liquid worth weekly because it fluctuates so much. My emergency fund is about 1/3 of my liquid worth, the rest being made up of the other sources. But when I make my car payment (remember its a huge payment), insurance payment, and a big Roth contribution all in a week, my emergency fund might now be 1/2 of my liquid worth. The next week, I get a paycheck and I’m back down to 1/3. Below is a little math to explain what I mean:
Liquid Worth = Emergency Fund + All other accounts + Credit card. Let’s say I have $1,000 available in each, giving me a liquid worth of $3,000. When I pay the bills, all “other” accounts are wiped out. Now my liquid worth is $2,000 made up of a credit line and the emergency fund.
This is the only aspect of my financial situation that worries me. I don’t want such huge fluctuations on a weekly basis, but its unavoidable while I’m paying down debt. My only solution is to track my cash flow and keep it manageable. What would make me feel better? Time, plain and simple time. As I continue to pay down debt, and grow my wealth, I’ll slowly relax on this.
My parents keep an enormous amount of money in liquid assets. More so than they need to but they are buying peace of mind in their conservative eyes. My goal is to have a year’s worth of salary available in liquid worth. This would include the bank accounts, and likely most would be taxable investments. When this happens paying the bills and getting paychecks won’t cause such drastic changes in my liquid worth. This will take a while and I do not know when it will be a reality. I do know that when it happens, I’ll relax.
 By The Weakonomist |
The Weakonomist is the founder of Weakonomics. Clicking the picture of the puppy will tell you more about him. If you like what you're reading consider subscribing to the blog, following him on Twitter, and checking out the related posts below. Please consider a donation if you really enjoy Weakonomics. |
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