Financial terminology describes your wealth as net worth, liquid net worth, liquid assets, liabilities, non-liquid assets, etc.
In this article, we shall clarify these terms, define what is net worth and liquid net worth, and share some tips on how to balance your wealth.
What is total net worth?
The total net worth is all the assets and money you own except the money you owe. To calculate your actual net worth, you have to do two things. First, sum up the prices of everything you own, like your home, cars, invested money, savings accounts, and bank accounts. Next, exclude the things you owe, like the sum of your mortgage loan, credit card debts, etc. These are your liabilities.
So, your total net worth is everything you own in cash, property, and investments minus your liabilities.
What is liquid net worth?
Your liquid net worth is money that is immediately available to you, like cash or money in bank accounts. Money locked in physical property or long-term investment is not liquid.
The types of liquid property are savings accounts, checking accounts, certificates, or short-term deposits.
Also, here, we include stocks, bonds, ETFs, and mutual funds. They can be sold and converted into cash quickly, making them immediately available assets.
So, your liquid net worth is all the money you have or things you can see quickly to get cash.
What are non-liquid assets?
Usually, your net worth consists mainly of non-liquid assets. Those are your real estate, cars, jewelry, equipment, or collectible items. They are non-liquid because converting them into cash takes time and effort.
Your retirement savings account is also a part of your non-liquid assets, as you can only take money once you reach a certain age or pay a commission.
Another type of non-liquid asset includes concepts or ideas with value, like intellectual property.
For example, several years ago, Netflix paid $320,000 to a scammer, Anna Sorokin, for the exclusive right to the film story of how she cheated the wealthiest people in New York.
Why is it essential to build liquid assets?
The enormous total net worth means wealth, but liquid assets are essential to accumulating wealth. Possessing liquid assets at hand allows you to develop your business freely using sudden investment opportunities.
For example, you are a company providing services in software development, marketing, or outsourced QA testing that needs to scale up to accept an offer for a big project. If you have a solid, liquid net worth, you can build up your team, equipment, or office space as fast as needed.
Liquid assets protect you from emergencies. According to Forbes Advisor, keeping three to six months of spending in liquid assets is recommended in case you temporarily lose profits. Experts also advise transferring some of the non-liquid funds into liquid ones to balance your wealth and have some money to operate.
Summing up
Non-liquid assets make a great way to accumulate wealth but to be fluent in how you use your wealth, it’s great to have some free money in your pocket. The success recipe is finding a balance between locked and unlocked money to use it safely and freely.
Author’s bio: Anastasiia Lastovetska is a technology writer at MLSDev, a software development company that builds web & mobile app solutions from scratch. She researches the area of technology to create great content about app development, UX/UI design, tech & business consulting.
