Introduction
Many people with significant net worth still feel financially constrained. The problem? Most of their wealth is tied up in illiquid assets like homes, retirement accounts, and businesses. While great for long-term growth, these assets don’t provide financial flexibility.
This article will introduce the Liquidity-to-Net-Worth Ratio (LTNWR)—a key metric to determine how much of your net worth is actually accessible when you need it. We’ll explore the ideal liquidity ratio, why it matters, and steps to improve financial flexibility.
What Is the Liquidity-to-Net-Worth Ratio?
The Liquidity-to-Net-Worth Ratio (LTNWR) measures the percentage of your total wealth that is readily available in cash or near-cash assets:
Liquid assets include:
- Cash & checking/savings accounts
- After-tax brokerage accounts (stocks, ETFs, etc.)
- Money market funds & short-term bonds
Illiquid assets include:
- Primary residence
- Business ownership
- Retirement accounts (401k, IRA) with withdrawal restrictions
- Real estate investments
Liquidity-to-Net-Worth Ratio Ranges: What’s Ideal?
| Liquidity Ratio | Situation | Implications |
|---|---|---|
| <10% | Highly Illiquid | Wealth is trapped in hard-to-access assets, leading to financial stress. |
| 10-20% | Moderate Liquidity | Some flexibility, but unexpected expenses or opportunities may require selling assets. |
| 20-30% | Ideal Range | Balanced growth and financial flexibility, allowing both security and opportunity. |
| 30%+ | Excess Liquidity | Cash-heavy but potentially missing out on investment growth. |
Example: John’s $1M Net Worth Breakdown
John has a total net worth of $1,000,000:
- Primary residence: $600,000 (60%)
- 401(k) & IRA: $300,000 (30%)
- Cash & after-tax accounts: $100,000 (10%)
John’s LTNWR:
Despite having a high net worth, John feels “broke” because only 10% of his assets are liquid. He lacks immediate access to cash for emergencies or investment opportunities.
When Should You Pivot to More Liquidity?
You may need to increase liquidity if: ✅ You have irregular income (self-employed, business owner). ✅ Your wealth is heavily concentrated in real estate or a business. ✅ You want flexibility for new investments. ✅ You’re nearing retirement and need more accessible funds. ✅ You constantly feel financially constrained despite strong net worth.
How to Improve Liquidity Without Sacrificing Growth
- Increase After-Tax Investments – Shift some savings from 401(k) into a brokerage account.
- Build Cash Reserves – Maintain 6-12 months of expenses in a high-yield savings account.
- Leverage a Home Equity Line of Credit (HELOC) – Access liquidity without selling your home.
- Sell Small Portions of Illiquid Holdings – Convert assets like real estate into REITs or stocks.
- Rebalance Your Portfolio – Ensure you’re not over-invested in illiquid assets.
Final Thoughts: Finding the Right Balance
Having a high net worth doesn’t mean financial flexibility. The ideal liquidity ratio (20-30%) strikes a balance between long-term growth and short-term financial security. By understanding where your wealth is concentrated and making strategic adjustments, you can ensure you have the liquidity needed for both peace of mind and financial opportunity.
Next Steps:
- Calculate your Liquidity-to-Net-Worth Ratio
- Assess whether your liquidity aligns with your financial goals, you may have hit your number, but now what?
- Take steps to improve financial flexibility without sacrificing growth
By optimizing your liquidity strategy, you can stop feeling “broke” despite having a strong net worth.
What are your thoughts on liquidity and financial flexibility? Leave a comment below to share your perspective!