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Net Worth(less), More Than You Know

Ok, Mike Meyers (Wayne) and Dana Carvey (Garth) may be wealthy, but your Net Worth is not the amount you believe it to be…and here is my little story behind that statement.

I got a call the other day from an old colleague I used to work with. He project-managed various financial work-streams that transformed processes, reducing costs and creating synergies across departments.  At the end of 2012, a cyclical downturn swept through the industry causing defensive financials measures to be implemented.  A fancy way of saying we cut all non-essential projects, him included.

Over the years, we kept in touch to discuss possible full-time opportunities in the market, but all he could ever find was temporary consulting work.  5 years later, he was in no better shape.  Two boys – one in grade school headed to high school and the other halfway through.  A mortgage, two cars, and all the fixings that come with living the American Dream.  Not an easy situation to financially manage through all of those years.

After the call, I couldn’t help but run through “what if” scenarios of my own. One question, above all others, kept popping up:

What if my emergency fund/savings ran out before I could find full-time employment? Where would I turn to keep my wife and I afloat?

And that is when I opened up my most recent Net Worth (as of 31-May-17) schedule and began to simulate a liquidation scenario.  Let me preface this exercise by stating, this is merely a doomsday illustration to see how much of my Net Worth would be converted into cash to pay the bills.

NET WORTH DISCOUNTING

The liquid assets are the first to go because they can be sold in a matter of days or weeks. This category typically includes personal bank accounts (checking, savings and money market), certificates of deposit (CDs), bonds, and brokerage accounts holding mutual funds, stocks and exchange-traded funds.

  1. Cash (and cash equivalents). I assumed all of the cash in my checking and savings (i.e. emergency fund) was spent.  Had I owned CDs, I would have discounted slightly for an early withdrawal penalty, as applicable.
  2. Bonds. In my Net Worth schedule, I do not include the accrued interest.  As such, no discount to their value.  Had I included the interest, a tax obligation would have been created in accordance with the gains.
  3. Brokerage Accounts (taxable). Since I do not manage my brokerage account, I do not know which investments are short-term vs. long-term and how to apply the applicable capital gains tax rate to each.  Therefore, I applied a 20% discount, conservatively assuming the entire portfolio was comprised of short-term investments – taxable at the higher rate.
  4. Life Insurance Policy. Given the maturity of my policies, I have the advantage of borrowing from the built up cash value and letting the continued growth sustain even with the loan and interest.  This is one of many benefits, simple interest loan vs. compounding policy growth, I leverage with life insurance.  A post for another time…

The non-liquid assets are typically those things you own, that incur a penalty when they are sold.  This category includes your retirement accounts (IRAs, 401ks, pensions etc), your home, real estate investments and any other investment that is not readily convertible to cash (i.e. vehicles, stock in a nonpublic company, jewelry).  Although these items often have a high value, their true worth is often a fraction of their initial cost.

  1. Retirement Accounts.  The 401(k), IRAs and a very small pension are all tax deferred.  I used the same 20% capital gains tax rate as my brokerage account, plus an additional 10% penalty for early withdrawal.  Note> it is important to be mindful of states that have early withdrawal penalties (e.g. Pennsylvania has a 3.07% tax).   Always consult a licensed CPA.
  2. Other. My real estate investments in PeerStreet are unable to be sold to another investor, according to the FAQs on their website. Therefore, I assumed zero proceeds. The note receivable and personal property, given how illiquid they are, were discounted by 50%.

Note> Liabilities remain constant at their current value. The proceeds, from the asset liquidation, would be used to pay off all debt (except life insurance policies loans as noted above).

There you have it, I am not as wealthy as I thought I was!  My Realized Cash Worth ends up being $272k less than my actual Net Worth – albeit in a doomsday example.  After seeing these numbers for the first time, I have to admit the result was not as bad as I thought.  At the same time, it makes me want to start managing to a Realized Cash Worth target figure, knowing that my Net Worth will always be that much more.       

What is your Realized Cash Worth?  What would you do differently?  How would you discount the sale of  your home, your car?

16 comments

  1. This is an incredibly fascinating look. I have to admit I never considered what my true net worth is if I had to liquidate everything immediately. I’ll have to go through my investments and figure out what the difference would be. Thanks for sharing!!!

    • It will be interesting to see how others approach similar assets. For example, real estate. Is the Zillow estimate true fair value that can be realized or discounted further? Would broker commissions and other expenses to get the property sold be contemplated? Whatever the assumption, periodic stress testing your Net Worth for long-term unemployment, a market downturn, regulatory changes or other is always healthy – a financial checkup. Thanks for commenting, MSM!

  2. Oh wow! This is a wake up call in a new perspective to looking at net worth. I think I need to go back and calculate based on liquidity… thank you for sharing!

    Mrs. Adventure Rich

    • I’d love to hear about how your calculation works out, especially for those items I do not have represented such as real estate and vehicles. The figures, I posted, were based on a liquidation – a rare event for most (hopefully). Within my Net Worth calc, I layered in a column to reflect a “stressed” scenario (i.e. 20%-30% market drop) rather than a complete liquidation. Thanks for commenting, Mrs. Adventure Rich.

  3. Great article with an honest look at net worth. Liquidating assets has a cost attached to them, taxes being the most notable. Still, net worth is calculated as what your stuff (investments) are worth minus liabilities. People need to realize net worth is not something you can convert into $100 bills without a discount. Good work.

    • Precisely. Whether liquidating or not, net worth converted to actual dollars may not be 1:1. Thanks for the comment, Keith.

  4. Very interesting. I am relatively cash heavy at the moment so percentage-wise I probably wouldn’t take as big of a hit as your numbers “would” but since we’re saving up for a house that’s kind of to be expected I think.

    • Being cash heavy (liquid) is a great problem to have. When you pull the trigger on your house, your Net Worth should increase (presumably) from the loan-to-value difference. How do you view this value, liquid or illiquid? Makes you think about different unexpected scenarios a bit more and the impacts to your Net Worth.

      My good buddy and I have a challenge to see how who can get into the 50/50 Club first (completely made up by my buddy), whereby you try to obtain 50% of your Net Worth in liquid assets and 50% illiquid. Much easier said than done, but fun to see how close we can get. Standby for the 50/50 Club article coming soon.

      Thanks for the comment, Dave!

      • I view it as illiquid – if I need it tomorrow or even in a week, I’m kind of in a bind and have to jump through more hoops than I’d like.

        I personally doubt I’ll consider my house as truly part of my net worth – unless I can capitalize on it. I don’t think most people realize any value from their primary residence until they sell it, unless they do AirBNB or something like that. I am kind of torn. If nothing else I would hate to think about what my net worth needs to be in order to FIRE and then forget to take into account that my home is a quarter of my net worth, then be discouraged about it! Haha

        That’s an interesting challenge. The only one I have going right now is a net worth race to $1M. I actually wrote about it a while ago and how having a financial buddy system in place helps keep me focused on some bigger goals. 🙂

  5. Great exercise! Another thing to consider is that if you are losing your job due to a downturn in the economy, your assets may not be worth what they are today when you do liquidate. I wonder what one should discount for that…

    • Wow, I never thought of that double-whammy! I believe the discount for that is to move in with family…HA!

      All jokes aside, this is exactly the kind of scenarios we should be shocking our Net Worth’s with to determine how healthy they are. It is almost as if you would want know – 1) how stable is my Net Worth in “Scenario X”, and 2) how long will “Scenario X” Net Worth last vs. my current standard of living.

      Thanks for the thoughts, Amy!

  6. Think you’re being a bit aggressive on your “Stocks” 20% deduction. It’s only 15-20% tax on your capital gains.

    • Hi Jon, you are absolutely correct. I added additional cushion in there for the unknowns that I am not fully knowledgable of, such as state & local taxes and market volatility. I definitely went to the extremes to see the effects my first time through. As you pointed out, I will absolutely be toggling my discount factors back to more normalized levels. Great pickup.

  7. This is eye-opening but wouldn’t you have the option to take a lesser paying job, build a business, or side hustle your way to stay afloat?

    • Hi J. To answer your question, yes. I would absolutely be pounding the pavement for a new job or start whatever was needed in order to bring back a stream of income to my family. The question I was trying to solve for is two-fold: 1) how much of my net worth could be readily converted to cash, and 2) how long would that last me, given my current living expenses.

      Now, in my post, I stopped short of answering the second part of the question and would hope that I could get through any lapse in employment with just my liquid assets.

      Let’s not assume a doomsday scenario, let’s assume I wanted to start my own business. I have everything in order to get my new business up and running, but what I can’t control is when it will start generating enough revenues to support my family. Knowing my liquidated net worth number, beforehand, might be the confidence I need to make that jump.

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