Liquid Net Worth

Knotted up in painful debt?

The Society Of People for a Positive Net Worth

What is Liquid Net Worth?

Positive Liquid Net Worth (+)

Assets

Debt

It's the difference between the

liquid assets you hold versus the
short-term debt you owe others,
which you use your liquid assets
to repay.
So, what's a Liquid Asset?

➔
Liquid assets are what you use to pay short term debts with!
➔ Cash (under the sofa, in the piggy bank, in your wallet)

➔ Checking/Savings and Money Market accounts

➔ Quick-call bonds and IOUs (paper savings bonds, expiring CDs)

➔ Stock held in a cash brokerage account (no IRA/401k)

Assets

Checking/Savings
Cash Money Market Accounts

Stock

Liquid means you can turn the

asset back into cash money
very quickly without losing
Exchangeable Bonds value.
And what is Short Term Debt?

➔
Short Term Debt (ST) is any debt that revolves month-to-month, or has a
short lifespan
➔ Credit Cards, Charge Cards

➔ Store accounts

➔ Short term loans (3yr or less, i.e. bank signiture loans)

➔ Installment Agreements (3yr or less, i.e. gym memberships)

➔ P2P Loans

➔ IOUs owed to friends, relatives

Debt

Credit Cards
Charge Cards IOUs, Short Term Loans
Store Cards Installment Agreements
Why doesn't LNW include my house, my car,
my boat, my 401(k), _______?

Let's rephrase the question: Do you regularly sell off

your car each month and buy a new one each time you
have to pay a monthly bill?

Your Liquid Assets are where you usually go to

pay your bills. You don't liquidate your hard
assets like your car, a house, a boat or your
retirement funds unless you're in a critical
financial situation.
Positive, Zero and Negative LNW

Negative (-)
Positive (+)

GREAT GOOD BAD

This is the situation where you Not 100% ideal, but now you've You have too much debt that you
want to be. You have more than balanced yourself so that you are don't have enough money to pay it
enough assets to cancel all of your no longer in debt and you can off. It's probably also interfering
short term debt and you have service the debt you have with few with your long-term obligations
enough left over for emergencies. worries. (like your mortgage).

Debt at this level leaves you

frustrated and worried. Most
people are in this situation.
How to calculate Liquid Net Worth
$???

How much?
The first step is figuring out
exactly what your LNW looks
Yikes! like. The easiest figure to come
up with is your debt.

$???

Debt 1. Find your credit card statements or go on-

line and get your current balances owed

2. Get the current balances on all your short

term loans, including HELOCs.
Assets
3. Get balances on all the other short term
obligations you have

This is your Total Short Term Debt

How to calculate Liquid Net Worth
$???

Now you need to figure out how

much in liquid assets you have.
Yikes!

$???

Debt 1. Add up the balances of all your bank

¿Cuando? accounts

2. Get the value of any short term bonds you

hold and all the equity you have stored in
Assets any cash brokerages (i.e. Scottrade, Schwab,
etc).

This is your Total Liquid Assets

How to calculate Liquid Net Worth
$13,189.73

$ (8,420.88)
LNW
Subtract the assets from the debt, and you
Debt
arrive at LNW.
$4,768.85
Keep in mind that most personal finance
software available can get you an exact
calculation based off your real transactions.

Assets

KMyMoney (Linux)
How Liquid Net Worth Changes
$13,289.73

Charge
$100 on credit

$ (8,420.88)
Increase savings
$100 + 100.00 savings
- 100.00 debt

Debt
$ (8,420.88)
LNW
$4,868.85 When you save $100 and charge $100, your
liquid net worth does not change because the
bank now has a claim against the $100 you
saved.
Assets
How Liquid Net Worth Changes
$13,089.73

Pay down
$100
$ (8,420.88)
+ 100.00
(8,320.88)
LNW
When you pay down $100 of debt and save
Debt
$0, your LNW increases by $100.
$4,768.85

Assets
How Liquid Net Worth Changes
$13,089.73

Pay down
$100
$ (8,420.88)
+ 100.00 debt paydown
+ 100.00 savings
LNW
Save $100
(8,220.88)
$4,868.85 Debt

When you pay down $100 of debt and save

$100, your LNW increases by $200.
Assets
Strategies for Negative LNW
What if I liquidate A LNW of -$8,420.88 means that if you used
everything? every cent you had right now (if you have
any or not), and threw it at all your debt,
$8,420.88
you would still have $8,420.88 of debt left
and no cushion for emergencies.

And that's not counting the fact that interest

will grow your debt over time.
$ (8,420.88)
Debt
Liquidating all your present assets might be
OK if you have a cushion to fall back on, like
a very (and we mean very) secure job, a
$0 spouse or another family member who can
support you, etc.
Assets
Few households have these luxuries, so
liquidating all of your assets for debt service
puts you at risk should your income
situation change.
Strategies for Negative LNW
What if I split my goals? By splitting your income into both debt
service and savings, both actions get you
closer to a balanced LNW of $0, better
known as being “debt-free.”

$13,189.73
- 100.00

Debt pay-down &

savings payment $ (8,420.88)
+ 100.00 debt reduction
+ $200 + 100.00 + 100.00 savings
(8,220.88) LNW
$4,768.85
Debt

Assets
+ $200
Strategies for Negative LNW
What if I stop saving and Attacking your debt directly is equally
just attack my debt? effective as the split-payment strategy,
although your savings reserves will not
increase except by what interest you earn.

$13,189.73

- 200.00
Debt pay-down
$ (8,420.88)
+ 100.00 debt reduction
+ $200 + 0.00
+ 0.00 savings
(8,220.88) LNW
$4,768.85
Debt
+ $200
Assets
Strategies for Negative LNW
What if my debt is really,
really high?
For situations like this, if your income in no
$690,000.00 way can chip away at extremely large debt,
or your income has fallen to the point where
your debt is no longer serviceable and only
increases over time, whether you are in
default or not, technically you are insolvent.

Those who are insolvent do not have assets

to service their debt in any significant way
Debt nor do they have incomes from which to
reduce their debt in a reasonable period of
time.

$7,100.00 There are two types of personal bankruptcy

you can pursue, Chapter 7 and Chapter 11
bankruptcy.
Assets

Bankruptcy is a tool. Use it wisely.

Plan for a Positive LNW
Which plan is right for me?
Liquidate Everything & Debt Attack - Great for those who have a solid security to rely on (friends/family)
and can risk living without a savings backup.

- Fastest way to clearing away debt.

Debt Attack + Stop Saving (Retain savings) - Good for those who have very steady incomes, reduces finance
costs over time
Split Debt Attack + Increase Saving Strategy - Fastest route to achieving positive Liquid Net Worth

- Costs more (interest paid out over time on debt)

Savings-Only Strategy (Minimum debt - Make minimums on all debt payments
service)
- Appropriate in situations where unemployment is very likely

- Costliest over time, as interest on debt is allowed to accumulate

- Provides a needed cushion in case income-loss occurs.

Personal Bankruptcy - Major FICO hit

- Ideal for ruinous situations (total income loss, no assets to repay)

- Ideal when interest+fees on debt accumulates faster than the

borrower's own income

- Useful tool to respond to massive accumulation of unserviceable

debt (i.e. medical bankruptcy)

- Appropriate response when lenders have accelerated repayment on

debt beyond the borrower's capacity to repay
Plan for a Positive LNW
How can I track my LNW over time?
The days of using finance
software to simply track expenses
has long been over.

Sure, they track your expenses,

but the most useful features in
them these days are the
forecasting tools that most of
these programs now come with.

And now these programs can

automatically download their
information directly (like Quicken,
Quicken Online and Mint.com)
and with other institutions all you
need to do is download a file from
KMyMoney (Linux) your browser.
Plan for a Positive LNW
Will a positive LNW help my credit?

Believe it or not, it does!

By increasing your personal wealth and liquid assets you will

naturally be more assertive about paying your present obligations and
you will also wield the power to control your revolving debt
utilization, one of the major scoring factors in FICO.

Increasing your LNW above zero allows you to become more assertive
over your existing credit lines and you can allow higher credit card
and signature line balances if you already hold the backstop assets
needed to cancel the debt out when you need to.

Proving to lenders that you can handle balances and show

good payment history can win you credit limit increases
and future FICO score bumps down the road.
Plan for a Positive LNW
For a better you!
There is no better relief and stress-reduction in the world than
clearing away your debt and having achieved a hard-won goal. Not
only do you empower yourself and have control over your own
finances, you control your own destiny.

Of course, we can't do anything about your 80th birthday...

fin.

The Society Of People for a Positive Net Worth