- Net worth is defined as assets minus liabilities -- everything you own minus every thing you owe. Draw a line down the middle of a piece of paper. On the left side list everything titled in your name, from your house, cars, boat, retirement plan, cash in the bank, brokerage accounts, furniture, stamp collection inherited from your father to your childhood baseball card collection. On the right side list every debt including mortgage, car loan, boat loan, margin balance on the brokerage account, unpaid taxes, 401(k) loan, credit card debts. Compare the totals by subtracting your liabilities from your assets; this is your net worth.
- Most people accumulate more assets than liabilities for a positive net worth. If you have more liabilities than assets, your net worth is negative. There could be many reasons for this, such as declining real estate values or stock investments gone bad. If you have cash in the bank but are underwater on your house more than your cash balance, that is how you can have a negative net worth with high liquidity.
- Money is the ultimate liquid asset.Creatas/Creatas/Getty Images
The easiest way to define liquidity is the ability to convert your assets to cash. There are varying degrees of liquidity. For example, cash in your mattress is immediately available. Cash in the bank requires you to drive to your nearest branch and make a withdrawal, or access with an ATM card. Cash in a brokerage account can sometimes be accessed with an ATM card, but usually with daily limits. Cash in a CD must wait until maturity, or you get penalties for early withdrawal. These are examples of various forms of cash. - Short-term bonds are the most liquid of all investments.Comstock/Comstock/Getty Images
A government, corporate or municipal bond can be considered equal to cash if there is less than two years to maturity. The difference, however, is that bonds must be sold in order to be converted to usable cash. Under New York Stock Exchange (where many bonds trade) rules, you must wait three days for a bond to settle for cash. You can request quick settlement, which makes the money available the next day, but it is at the buyer's discretion. Bonds can also be margined, meaning you can borrow against them, but there are limits, usually 50 percent of the market value, and there are margin interest charges that can exceed the interest earned on the bond. - Although highly liquid, stocks can experience severe volatilty.Hemera Technologies/Photos.com/Getty Images
Actively traded stocks are highly liquid but still subject to the three-day settlement rule. Stocks can also be highly volatile. Being highly liquid doesn't mean highly safe, at least as far as stocks are concerned. It only means that you can convert whatever your holdings are to cash. - A house can take months to sell, making it highly illiquid.Thinkstock Images/Comstock/Getty Images
There are other types of investments that can be converted to cash, but that take time and can cost significant fees to liquidate. These are considered illiquid investments. Annuities are one example, where there is an option to sell, but there can be penalties for seven years or more from the date of purchase. Small-company stocks also can take a long period of time to sell a large position because of low trading volume. Real estate is another example where selling, especially at the wrong time, can net less than fair value, and fees can be very high. The best rule of thumb for liquidity is that the harder it is to sell something, the less likely you are going to get fair value on sale.
Own vs. Owe
Positive vs. Negative
Liquid vs. Available
Bonds vs. Cash
Stocks vs. Bonds
Liquid vs. Illiquid
SHARE
