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What is Liquid Net Worth?

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  • Written By: Keith Koons
  • Edited By: Lauren Fritsky
  • Last Modified Date: 31 August 2016
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Liquid net worth is a financial term that is used to describe the amount of funds an investor readily has access to. While the most common form of a liquid asset is currency, the definition would also apply to any investments that could quickly be converted into cash. Stocks, bonds, mutual funds, and precious metals would be some of the examples that fall under liquid net worth. Items like real estate, expensive automobiles, and corporations would not. Normally, liquid net worth is actively measured to determine the overall flexibility of investors, which would allow them to quickly take advantage of any worthwhile opportunity that presents itself.

It may not appear that liquid net worth would be very important within the financial world, but it actually places investors in an extremely lucrative position. When a wealthy individual holds mainly liquid assets, he is often earning interest in the double digits while remaining almost immediately available. This means that if a situation would occur where capital was required, it could be obtained very quickly, so it grants investors peace of mind that their finances are in their control. Investments in fixed assets require a willing buyer to take possession of the inventory in order for it to become liquid, and this is often difficult to do on short notice.

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For example, if two investors both had a relative net worth of $10,000,000 US Dollars (USD) on paper, their wealth would be identical. If the first investor had the majority of his assets in stocks while the second individual only owned high-value real estate, the comparison becomes much more imbalanced. The first investor would be free to move his money in and out of the stock market while the second investor may be struggling to pay off his monthly expenses, so there is really little comparison related to who would be in the stronger position. It may take years for the second individual to actually have his net worth in liquid form, and during that period, the real estate market could either rise or sink while he was powerless to do anything about it.

Since the first investor in the above example had a liquid net worth, he would be able to pace the market whenever commodities changed for better or for worse. This is the sole benefit of having a liquid net worth, and it is why experts suggest carrying a diversified portfolio with no more than 50% fixed assets. While this is not always possible, it grants much more freedom with very few negative drawbacks.

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