Net Worth, Net Investable Assets, and Net Liquid Assets

I'm a big fan of the Net Worth metric. I think it paints a nice picture of what position you are in financially, and gives you an easy way to set goals. But it has flaws, says Nickel. He suggests a similar measure with a different name and one major difference: Net Investable Assets. In a comment, FMF of FreeMoneyFinance goes a step further with Net Liquid Assets. I'd like to take a look at all three metrics because they each have something to offer.

Net Worth. The classic measure of wealth. All of your assets (cash, investments, property, etc.) minus all of your liabilities (loans, revolving debt, etc.). This is a great measurement because it paints the whole picture-- how much MONEY do I have? If I sold it all and moved to South Dakota, how much would I be taking with me?

Net Investable Assets (NIA). Nickel dislikes that the net worth calculation involves the primary residence and personal possessions:

The main reason for my aversion to net worth calculations is that I’m most interested in charting a course to financial independence and, in my view, financial independence doesn’t involve selling our house or getting rid of our cars. True financial independence involves amassing enough wealth that you’re able to live of your investment income with no additional input.

In his view, NIA provides a good measure of this. You simply tally up your assets and liabilities, as before, but eliminate your residence and personal property (side note-- I'm not sure what Nickel would say about an auto loan. Even if I don't count the value of the auto, I think I still ought to count the loan as a liability).

Net Liquid Assets (NLA). FMF says:

I track and record my net worth every month. In addition, I also track and record my liquid assets (the ones I can get my hands on easily and without penalty) which excludes my home and retirement investments.

I think it's wise to continue to leave personal property out of this equation as well. This becomes a measure of how much money I have that I can readily get my hands on without having to start selling my stuff or tap into retirement funds. Another good measure.

Let me just say that I like all three of these very much. They're all similar measures but the purpose of each is considerably different. I have added NIA and NLA to my tracking spreadsheet and think they'll be very informative.

This all leads to a question for me. What percentage of your net worth should be in NIA? In NLA? It's a tough question, and depends largely on your goals. If you have no plans to retire early, NLA can merely be whatever amount makes you comfortable in case of an emergency, since you don't need the liquidity otherwise. But if you plan to retire early (as I do), you'll need assets you can get to without penalty. As for NIA . . . well, that's tough. For a renter this is not a MAJOR issue, as your net worth and your NIA aren't terribly different. For a homeowner, perhaps the percentage is not so important as long as you have goals set with NIA, not just net worth, in mind.

As for me, here's how the numbers break down: 48.7% of my net worth can be classified as NIA, and 5.7% of my net worth can be classified as NLA. So personal property and my residence comprise just over half of my net worth. I knew this already, and getting that under 50% has been a minor goal for me.

The shocker is the NLA. 5.7% of net worth? Just 12% of NIA? That seems really lousy and I'm not comfortable with that number, and if I'm to retire early, it will have to grow rapidly. What this amounts to is cash savings + taxable investments - non-mortgage debt.

When I read other blogs, some people have negative net worth. I always felt good because mine was significantly positive. Well . . . my NLA hasn't been positive until recently. It was probably negative last summer, as I had a car loan with a much larger balance and no brokerage account. If people took a hard look at this, some people with great net worth may not look as rosy, and some with negative net worth might look far worse off (credit card debt would be nasty for NLA).

There is a bright side though, for me and everyone else. NLA can grow rapidly. Probably much more rapidly than net worth or NIA, if you are committed to it. Why? Because all debt repayment will go straight to to this bottom line, and as a %, the growth can be tremendous-- especially early on.

Take me for example. My net worth has grown 17.3% since February. My NLA has grown 83%. Why? Well, two reasons. One, it started small. Damn near zero. Two, debt repayment on my car loan and eye surgery is contained in my NLA, and these account for nearly $800 each month. That's a far larger percentage of NLA than it is of net worth. In the coming months I expect it to continue a rapid ascent. I'll know that my NLA is in better shape when it starts to slow down a little-- this will mean that my debts are gone and my NLA isn't so tiny anymore!

I'll be thinking, in the coming weeks, months, and years, about what percentage of my Net Investable Assets needs to be liquid. There is an answer out there and I just have to do some math to get a good estimate. It's clear to me that this is the weak area of my financial situation. I have to thank Nickel and FMF for their comments on the topic. Without them, it may not have jumped out at me as it has.