Is It Better To Have a Higher Net Worth or Bigger Savings? An Expert Explains
Written by
James Holbach
Edited by
Gary Dudak
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In order to manage your money and meet your financial goals, you have to have a way to measure success. This is perhaps an obvious concept, but that doesn’t make it any less important.
What does your current financial health look like? What do you want it to look like in the future? Without a clear set of goalposts, you’re doomed to fail before you’ve even started.
While the need for a way to measure financial one’s position is apparent, the specifics aren’t always so clear. It’s hard to know what you should be focusing on and what is most important to quantify. Should you worry about increasing your net worth, or is it better to have more money saved in the bank? GOBankingRates spoke to experts to find out.
What’s the Difference?
Savings could mean a lot of things, but in this context it would more precisely be known as liquid net worth. Liquidity means the ease and speed with which an asset can be exchanged. For example, a publicly-traded stock is typically extremely liquid. These days you can buy or sell a share of company stock more or less instantly through your online broker, often without paying any commissions or fees.
An illiquid asset, on the other hand, is one that cannot be easily bought and sold. Suppose you own an original painting by a well-known artist. That painting may be quite valuable, but you can’t just sell it at the click of a button. You’ll need to list it for sale somewhere, perhaps an auction house, and will almost certainly have to pay a commission on the sale (you may also need additional help from an expert deciding how much to sell it for). All of that will take time and cost money.
So when we talk about savings, we are talking about your wealth as measured by the cash you hold, as well as very liquid assets like stocks.
Why Liquidity Matters
Liquidity is important for a number of reasons. One is that liquid assets are much easier to value accurately.
“Not all assets are created equally. That is, one can have cash in a savings or checking account or one can own real estate. If one has cash in a savings account there is no doubt what that is truly worth. But, the value of real estate is not clear at any given moment,” said Robert Johnson, PhD, CFA, and Professor of Finance at Creighton University’s Heider College of Business.
This is where it can get tricky for individuals who want to measure their wealth. You may have a sense of how much your home is worth, for example, but you can’t know for sure until you sell it.
Total Net Worth
Total net worth is a much more inclusive measure. “An individual’s net worth is simply the value of assets minus value of liabilities,” Johnson said.
That means not just cash and stocks, but real estate, art, collectibles, and even your car and the furniture in your home. It’s important to understand that total net worth accounts for the negative value of liabilities like debt, as well. That means your total net worth is a much more comprehensive measure of your financial situation than just your savings, or liquid net worth, which comprises only a specific portion of your total wealth and does not take liabilities into account.
Which Is Better?
So which one is more important, and which one is better to increase?
Liquid net worth is very easy to accurately value, which makes it useful as a measure of your financial health. It also gives you a clear idea of how much of a cushion you have if an emergency expense comes up. Another benefit is that it’s easy to sell stocks in a hurry, whereas if you have to scramble to sell a house, you’ll likely have to do it at a price that is lower than its true market value.
Total net worth is a much more complete and holistic measure of your financial health, but at the same time it’s much more difficult — sometimes even impossible — to nail down to the penny, making it less accurate overall.
The best answer is that either one might be more or less important depending on the specifics of what you want to understand about your financial position.
“Savings and net worth aren’t mutually exclusive terms, in fact, they could refer to the same thing. If I am accumulating funds for retirement, I would call that my savings, even though nearly all of those funds are invested in the stock market. On the other hand, some people think of savings as readily available cash — for instance, emergency savings for a rainy day,” Johnson said.
“The bottom line is that wealth accumulation is about building net worth with an eye to a realistic liquid value of that net worth,” he concluded.
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