After the application of a home loan, you will receive two documents, a loan estimate, and closing disclosure. On the surface, these documents are identical but they both serve slightly different purposes. Up Next: Expenses To Expect In The First Year Of Homeownership Here is what you need to know about the differences between these […]
Why is Liquid Net Worth Important?
Your net worth and liquid net worth are valuable pieces of information that helps you and your lender see if you have grown financially and continue to do so. Positive net worth and liquid net worth provides borrowers with more freedom to live without depending on their income week to week.
Why Should I Know My Liquid Net Worth?
Your liquid net worth is the best way to measure personal wealth and your short-term finances. It can help you:
- Track your financial progress
- Prepare for retirement
- Apply for a loan
The greater your liquid net worth, the more likely you are to be able to endure a difficult financial situation. Before you can begin calculating your liquid net worth, you need to complete a list of your liquid assets. Liquid assets are categorized as available, readily convertible funds that won’t lost their value. Once you have your list, you can begin to calculate your liquid net worth.
Calculating Your Liquid Net Worth
To begin determining your liquid net worth, you must first calculate your net worth. Here, you simply add up your total assets and subtract your total liabilities from your assets.
Liabilities can include:
- Student loans
- Car loans
- Credit card debt
Finally, divide your liquid assets by your liabilities to find your liquid net worth. You can multiply your calculated liquid net worth by 100 to figure your number as a percentage.
If your liquid net worth is 100 percent or greater, you should have enough cash to clear your debt if you needed to without calling on other non-liquid assets. If your liquid net worth is less than 100 percent, you would not be able to raise immediate cash to quickly cover your debt.
The number determining your liquid net worth will not remain static. It will fluctuate from time to time given your financial situation. However, it is a good idea to manage your finances responsibly so your liquid net worth can remain positive.