I 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.
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!