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True Liquid Net Worth

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Liquid Net WorthI want to discuss an idea that popped into my head the other day, the idea of a true liquid net worth to complement your “net worth.”

When you look at your net worth, you have a liquid part (cash, short term investments) and an illiquid part (hard assets like your home, your cars). The liquid part is easy to convert into cash. With stocks, you can sell them pretty quickly. Just load up your broker, enter in the order and boom. Funds won’t be available immediately but you can usually get them within a few days. The illiquid part is still convertible to cash but it takes longer than a few days. It’s hard to sell a car very quickly unless you’re willing to take a haircut.

That’s where the idea of a true liquid net worth, a term I’m pretty sure no one else uses but it’s what came to me when I was playing with our net worth Excel spreadsheet. I was trying to build one sheet that acted like a Dashboard. One sheet that hid all the rows and columns of numbers and gave you a 10 second look at where we are with our finances.

Net Worth Dashboard

The sheet broke out where all of our money is – cash, investments, and miscellaneous. Cash is broken out into the bank account it’s in while investments is broken out into taxable, retirement, or other. Taxable is for those holdings I have in a taxable account while the retirement category covers the Roth IRA, Rollover IRA, etc. Miscellaneous is for everything else – cars, our home, and our Series I bonds (which, by the way, I am still not sure where to categorize them).

Cash is 100% liquid, obviously, but what discount should you put on the other categories?

Figuring Discount Percentages

So we have four items that need to be discounted: Taxable investments, retirement investments, our home, and our car (we only include the Venza we purchased since tracking our net worth).

Taxable Investments are discounted by 5%. I wanted one simple number that would reflect the taxes, both long term and short term capital gains, we would owe upon selling everything. Long term and short term rates are much higher but the majority of that sum consists of my initial investment and not our gains. Initially my guess was 10%. When I went back to calculate what it should actually be, I discovered my discount is actually just 2.06% given share prices at the time. So I settled on 5%.

Retirement Investments are discounted by 35%. The majority of our retirement assets are in a tax deferred retirement accounts like Rollover IRAs and 401(k)s. A small portion is in tax free Roth IRA. My guess was that if we liquidated all of these accounts then we’d owe taxes at effectively 25% (federal + state) plus another 10% for the early withdrawal penalty.

Our Home was discounted by 25% and our Toyota Venza was discounted 50%. The tricky part with both of these values is that I don’t have much confidence in the assessed value of either asset. For our home, I’ve kept it at the appraised value when we purchased the home back in 2005. Our home is worth somewhere in the neighborhood of that figure (plus or minus the percent) and I never kept up with it because I didn’t care much. As for the car, I always check the KBB private sale value once a year and leave it at that.

Summary

The goal of this exercise was to get a better understanding of where our finances are in more real terms. As it turns out, given all the discounts, our true liquid net worth is about 11% lower than our actual net worth. In my mind, the number itself is not as useful as the thought process behind the discounts and just thinking about what you would do to liquidate some assets. It’s a lot like running a fire drill.

Like many things in finances, it’s not the numbers that matter. It’s the thinking behind it and that’s where I want to get your thoughts on what I did. Do you think the idea of a true liquid net worth, adjusted for how you would actually liquidate assets, is worth doing? Is it just a useful exercise with little practical value? Do you think my discount figures are too high or too low? Please let me know what you think!

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11 Responses to “True Liquid Net Worth”

  1. I keep track of all of our assets and liabilities in one excel workbook over several worksheets, I keep a lot of different totals for different reasons, liquid vs. illiquid, retirement vs. taxable, my assets vs. my wife’s assets and our joint assets. I have never thought of applying any discounts to my assets to convert them to cash as I don’t see a practical benefit to doing that. If I were to sell a stock to purchase something I would not apply a discount to all of my stocks, I would just calculate the cost for that transaction and all of the alternatives I am looking at. My net worth will be different before and after but not by anywhere near as much as discounting the entire asset base. Same thing with retirement accounts, applying current tax rates as discounts to something I will not be touching for decades is not practical as the assets will grow and taxes will change long before I liquidate them, by discounting them you lose sight of the benefit of tax deferral, had I needed those assets sooner I would not have locked them up in a tax deferred account.
    I do have totals for both my liquid net worth and illiquid net worth which I think is important, my house, cars, jewelry etc. is part of the total but not liquid and it is important to be aware of that. I also think it is important to know the breakdown of liquid assets between taxable, tax deferred and tax free, those totals are very useful as well.

  2. Dean Nichols says:

    Just coincidental that you are considering your net liquid assets at the beginning of Obama 2.0?

  3. Dean Nichols says:

    Just coincidental that you are conducting your finanacial fire drill as we prepare for Obama 2.0?

  4. Jeff says:

    Use the KBB trade in value and you don’t need to discount.

  5. Jim, I think your exercise is useful and agree the thought process in itself is illuminating. One thing I might do differently though with respect to the deferred tax retirement accounts. Unless you’re actually contemplating liquidating your retirement accounts today (and I know you’re not), not sure I see the point of dinging yourself the 10% penalty + your marginal tax rate today. More than likely you’ll liquidate these funds when you won’t owe the penalty and at a future tax rate (admittedly very tough to guess, but conventional wisdom has always been your retirement rate will be lower than your working-years rate). What I’d be interested in knowing is not my true liquid net worth today, if I liquidated now, as that’s an academic question only, but rather what’s my true liquid net worth assuming I’ve retired and can make retirement account withdrawals penalty-free. Just a thought.

    • Jim says:

      So the goal behind this value is to know the current liquid value of all my accounts if I were to liquidate them today, which is why I assess the penalty and use today’s marginal rate. It’s valuable not because it’s necessarily academic but because it’s important to know where I stand if I were to cash everything out today. It’s actually less valuable for me to project 40 years into the future, using growth assumptions, and see what I have in retirement. That, to me anyway, seems more academic.

      As for what you suggest, that’s even less important given my age…

  6. mannymacho says:

    Sounds like a pretty good snapshot to give you a better idea of true net worth, but that would be a rather exhausting exercise to do on a regular basis.

  7. Dave says:

    Is there a place or url where I can download your sample excel spreadsheet to use as a surrogate in creating my own? Thanks in advance.

    • Jim says:

      Nope, it’s really nothing more than columns for my different accounts and then a summation. There isn’t much else to it.

  8. F2O says:

    I calc my Liquidity Ratio. (Total liquid assets/monthly expenses) Since it only includes liquid assets – checking accounts, savings accounts and cash in investment accounts, it gives me a good idea how far I could go without any income coming in and not resorting to selling other “hard” assets.


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