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.

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.
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.
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.
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.

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.
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?