I collected comic books when I was younger.
Well, collected is probably a misnomer. I read comic books as a child and I put them in plastic sleeves with non-acidic cardboard backers and then put them in a long box. That box now sits in my basement and brings back fond memories. I even taped a newspaper cut out of an interview with Jim Lee, an artist for Marvel and co-founder of Image Comics, on the box. I was pretty into comics. 🙂
My mother would tell me that my comic books are only worth as much as someone would pay me for them. I would point to price guides and tell my mom she knew nothing! 🙂
Nowadays, I know more… and like all moms everywhere, she was right. (Those comic books are priceless though)
That lesson is something I integrate into my finances today. As you may know, I keep a pretty detailed Net Worth Record document that tracks all of our accounts on a month to month basis. It, along with our money field manual, forms the basis of our core financial documents. It's helpful to know all this so I can compare it with the average net worth as well as see how things have progressed over the years.
In my original post explaining how it works, I left one thing out.
In addition to adding up all the accounts to get our net worth, I also calculate a “True Liquid Net Worth.”
What is Liquid Net Worth?
A True Liquid Net Worth is what our estate would be if we liquidated everything immediately.
Immediately is a somewhat relative term… you can't “immediately” sell a house like you can sell a stock. In general terms, it means how much we'd get tried to quickly sell our house, both cars, and liquidated all investments – what would the total dollar amount be? Remember, it's only worth what someone will pay us for it.
Knowing you have $100,000 in equity in your house might give you financial confidence but it's not as much as $100,000 cash in the bank – that's what Liquid Net Worth looks to capture.
In some circles, liquid net worth is just the amount you can get access to within 24 hours. However you define liquid net worth, it's important to recognize that your net worth is not 100% liquid. The numbers I use below to calculate my liquid net worth may be different than yours and that's OK. It's about visibility into your finances, not 100% accuracy.
Why Is This Important?
I'm a fan of creating an emergency plan in addition to an emergency fund.
Much like you should have a plan if your house caught fire, you should have a plan for major emergencies. Wouldn't it be important to know how much cash you have access to in a short period of time?
The great thing about calculating this is that if you keep track of your net worth, it's just an extra equation a spreadsheet can do for you.
How We Calculated True Liquid Net Worth
All of the accounts are combined into six buckets:
- Cash (and Cash Equivalents)
- Taxable Brokerage Investments
- Retirement Investments
- Direct Investments – angel investing, private placements
- Assets – Home
- Assets – Car
The purpose of buckets is to apply an appropriate discount.
I based the discount on taxes, penalties, and what I felt would be reasonable given a quick sale.
In all cases, I aimed to be as conservative as reasonably possible:
- Cash (and Cash Equivalents) – No discount, it's already cash. If a large portion of it were in CDs, I would discount it slightly for the early withdrawal penalty but it's not right now.
- Taxable Brokerage Investments – I applied a 20% discount which is extremely conservative. We've held most of our investments for over a year so the actual taxes are going to be much lower than 20% plus the capital gains tax rates are on just the capital gains. Our discount is on the entire portfolio including principal.
- Retirement Investments – I applied a 30% discount. I have a mix of a tax deferred and tax-free investments but the bulk are in tax-deferred so I figured I'd take my 20% from the taxable brokerage discount and add the 10% penalty for early withdrawal.
- Direct Investments – I applied a 50% discount because these are all very illiquid. They're a mix of notes and equity.
- Assets – Home – I applied a 25% discount and this is based on the difference between the purchase price of the home (setting it to the purchase price is not optimal but it's easy – here are a few other ways to value your home) and our outstanding mortgage balance (equity). I don't mark to market when it comes to the residence and I figure a 25% discount covers the fees and discount for a quick sale.
- Assets – Car – I applied a 20% discount based on the KBB Private Party sale price. We value the cars once a year, in January, and leave at that.
On the whole, our True Liquid Net Worth is currently 76.77% that of our regular Net Worth.
It also gives me a strong sense of how much cash we could get our hands on in a reasonably short period of time. Cash and cash equivalents are accessible within a day. Investments would be liquid within a week. The rest take much longer, but now I have an idea of how many “levels” of cash I have and how long it'll take to get it.
Your net worth isn't cash in the bank and this calculate reflects that. And it takes minutes to set up. 🙂
Do you do a calculation like this? If so, how do your discounts compare? If not, what do you do instead?