The plain-vanilla net worth number is useful mostly in tracking your financial progress through life – if it goes up, you’re doing well. If it goes down, not so much.
Liquidnet worth, however, tells you two crucial things.– What’s the largest expense I could cover in the short term?– If my financial sky started falling, what’s the worst-case scenario I could still survive?
Let’s start with the “fire sale from hell” situation, and put an asterisk next to those items you’d exclude from the “incredible opportunity” scenario.
While your net worth is an important measure and lets you track your financial progress (up or down), your liquidnet worth is a far more useful gauge of unexpected surprises you can survive and opportunities you might be able to afford getting into. The above shows you a simple way to define and calculate that liquid net worth, whether for the survival situation or the opportunity one.