July 15, 2024
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THE MONEY MINDER

‘It’s harder to reach a liquid net worth of $1M+’: I’m confused about basic financial terms impacting my net worth. How can I clarify this muddle and plan better?

‘It’s harder to reach a liquid net worth of M+’: I’m confused about basic financial terms impacting my net worth. How can I clarify this muddle and plan better?

Hi Money Minder,

Ever get tangled up in all those fancy financial terms? Let’s break it down so everyone can get a handle on it.

Assets — When we’re talking Net Worth, this is anything valuable you own. It can be easy-to-sell stuff (liquid) or harder-to-sell stuff (illiquid).

Liabilities — This means any debt you owe. Think loans, credit card balances, or any money you need to pay back. If it’s owed, it’s a liability.

Net Worth — It’s all your Assets minus all your Liabilities. It includes everything: home, cars, jewelry, and whatever else you own. If you’re ignoring some stuff, you’re actually talking about a tweaked version of Net Worth, not the real deal.

Millionaire — Someone with a Net Worth of over a million dollars.

Liquid Assets — This is your cash and stuff you can easily turn into cash, like stocks, bonds, Certificates of Deposit, and Money Market certificates. Real estate, cars, and jewelry don’t count here because they’re harder to sell quickly.

Liquid Net Worth — Here, we’re talking Liquid Assets minus your Liabilities. It leaves out the value of things like your home and cars because they aren’t liquid. But remember, any loans you have on these illiquid assets still count as liabilities. This makes hitting a $1 million liquid net worth trickier.

Cheers from,
Asset Ace

Response from THE MONEY MINDER:

Hello There

Hello there!

I understand that financial terminologies can sometimes be confusing and tricky, especially when you’re navigating discussions around net worth, assets, and liabilities. Let’s break down these terms clearly to help you understand and effectively use them in your financial journey.

First, let’s talk about assets. When discussing net worth, assets encompass everything of value that you own. These can be tangible items like your home, car, or jewelry, or financial assets such as stocks and bonds. It’s important to remember that assets can be classified into two categories: liquid and illiquid. Liquid assets refer to cash or items that can easily be converted into cash, such as stocks, bonds, certificates of deposit (CDs), and money market accounts. Illiquid assets, on the other hand, include things like real estate, vehicles, and jewelry, which can’t be quickly sold for cash without potentially losing value.

Liabilities are essentially any obligations or debts you owe. This includes loans, credit card balances, mortgages, and any other financial commitments. In short, if you owe money on something, it falls under liabilities.

To calculate your net worth, you subtract your liabilities from your assets. This simple formula: Net Worth = Assets – Liabilities, gives you a snapshot of your financial health. It’s crucial to include all categories when calculating your net worth for an accurate picture. A millionaire, in financial terms, is someone whose net worth exceeds $1 million.

When people talk about liquid net worth, they are speaking specifically about their liquid assets minus any liabilities. This measure is often used to determine financial flexibility and readiness to meet short-term obligations because it excludes illiquid items like real estate or cars. It’s noteworthy that achieving a liquid net worth of $1 million is generally more challenging due to the exclusion of these physical, often valuable, assets.

Given the information, a practical approach would be to regularly review and categorize your assets and liabilities. This clarity will help you make informed financial decisions. For instance, consider focusing on increasing your liquid assets and simultaneously managing and reducing your liabilities. Setting financial goals, like saving a certain amount in liquid assets or paying off a specific debt, can also help you steadily improve your financial standing.

Wishing you the best on your financial journey. Remember to approach it step-by-step and stay informed.

Best regards,

THE MONEY MINDER

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