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.
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.
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 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?