Liquid net worth refers to the amount of easily accessible funds an investor has, including assets that can be quickly converted to cash. It allows investors to take advantage of opportunities and earn double-digit interest. Fixed assets like real estate and expensive cars are not included, and a diversified portfolio with no more than 50% fixed assets is recommended.
Liquid net worth is a financial term used to describe the amount of funds that an investor has easy access to. While the most common form of a liquid asset is currency, the definition would also apply to any investment that can be quickly converted to cash. Stocks, bonds, mutual funds, and precious metals would be some of the examples found within liquid net worth. Items like real estate, expensive cars, and corporations would not. Liquid net worth is typically actively measured to determine investors’ overall flexibility, which would allow them to quickly take advantage of any worthwhile opportunity that presents itself.
It may seem like liquid net worth would be very important in the financial world, but it actually puts investors in an extremely lucrative position. When a wealthy individual owns primarily liquid assets, he often earns interest in double digits while remaining almost immediately available. This means that if a situation were to occur where capital was required, it could be raised very quickly, giving 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.
For example, if two investors had a relative net worth of $10,000,000 US Dollars (USD) on paper, their wealth would be identical. If the first investor had most of his assets in stocks while the second individual only owned high-value real estate, the comparison becomes much more lopsided. The first investor would be free to move their money in and out of the stock market, while the second investor might find it difficult to pay their monthly expenses, so there is very little comparison regarding who would be in the stronger position. It may take years for the second individual to have his net worth in liquid form, and during that period, the housing market could rise or fall while he had no power to do anything about it.
Since the first investor in the example above had a liquid net worth, he would be able to monitor the market whenever commodities changed for better or worse. This is the only benefit of having a liquid net worth, which is why experts suggest carrying a diversified portfolio with no more than 50% fixed assets. While this isn’t always possible, it gives you a lot more freedom with very few downsides.
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