Your true net worth

By Slow Dad - April 16, 2017

How much of your carefully tracked net worth is actually accessible? Within a month? Within a day? Chances are it is much less than you think.
Many years ago I survived a tour of duty working at a large American investment bank.

It was easily the worst place I’ve worked. For the most part the people were complete savages, personifying on a daily basis the cliched “caffeine and cocaine” driven masters-of-the-universe lifestyle endlessly portrayed in Wall Street themed Hollywood dramas like Boiler Room, Margin Call, The Big Short, and Trading Places.

During that gig one of my colleagues was a quiet guy named Carlos. Like the rest of us, he was slaving his way through the 08:00 to 23:00 working days, and like the rest of us was forever having to cancel plans and make apologies for letting down his friends and loved ones.

The great escape

Mid-afternoon on one random day Carlos reached the point where he had enough. He locked his computer, stood up from his desk, and commented to an inattentive colleague that he was just popping out for a bit.

This in itself was unusual, as the firm had carefully removed any excuse a staff member may make to actually leave the building. There was a free Starbucks on the trading floor where we all worked. There was a concierge service that took care of the dry cleaning, posting letters, even purchasing the occasional birthday/anniversary/Christmas gift. There was a gym and heavily subsidised cafeteria, both open 24x7, in the basement. There was even a drop-in medical clinic, to keep the bankers well supplied with anti-depressants and Viagra.

Carlos never came back.

Where in the world is Carlos?

Nobody noticed Carlos’ absence for the first day or two.

On the third day some of his colleagues grew a little concerned. He hadn’t called in sick or booked time off on holiday, and wasn’t answering his phone.

On the fourth day a couple of us popped around to his flat, and when nobody answered our knocks we broke in. There was nobody home, but all his stuff appeared to be there. Clothes in the wardrobe. Expired milk and leftover takeaway curry in the fridge. Overripe fruit on the bench.

On the fifth day we reported Carlos’ absence to the bank’s HR department, who didn’t really care. He wasn’t a rockstar research analyst or one of the head traders. They didn’t have an emergency contact on file, so there was no one for us to call. We debated whether we should call the police and report him missing, but I don’t recall whether we actually did in the end.

Ticket on the next plane heading somewhere sunny and warm

A week or so later we learned that Carlos had left the office and caught the tube to Heathrow airport. He marched up to the British Airways ticket counter and asked for an economy class ticket on the next plane to somewhere sunny and warm. That turned out to be an American Airlines flight to Costa Rica via Miami.

A couple of days later Carlos had rented a room in a boarding house at Playa Ocotal, and taken a job as a scuba diving instructor ferrying tourists out to the Bat Islands.

Carlos explained he had reached the point where he wasn’t happy with any aspects of his life, and felt that he desperately needed a change. He didn’t like his boss. He didn’t like his landlord. He didn’t like most of his colleagues, and it turned out he didn’t have many friends in London.

So he just grabbed his passport and his credit card and left.

What is in your in your Bug-Out Bag?

In the movie Heat, starring Robert De Niro and Al Pacino, De Niro’s character has the memorable line:

Don’t let yourself get attached to anything you are not willing to walk out on in 30 seconds flat if you feel the heat around the corner.

Think about that for a second.

If you were to decide to do a Carlos, and disappear without any notice or advance planning how much could you take with you? Chances are it wouldn’t be much, restricted to just your cash and cash equivalent holdings.

Sound far-fetched? Perhaps, but depending on where you live you never know when a natural disaster (bush fire, flood, Mum’s cooking, earthquake or similar) will require a rapid change of scenery. Possibly for an extended period of time.

In a similar vein, Rene Russo’s character in the great movie The Thomas Crown Affair has another memorable line:

If I had to be gone, and I mean seriously gone, in about eight hours… how much could I take with me?

This isn't actually the scene containing the quote, but it does have Rene Russo dancing...
In the FIRE world we all wax lyrical about tracking our net worth, and maximising the tax efficiency of our financial affairs. That is a very different number to the amount of cold hard cash you could actually lay your hands on within a relatively short time frame.

If you had to get up and go with a very limited run up, how much are you actually worth? Chances are it will be much less than you think.

Want to see a magic trick? Watch your your net worth shrink before your eyes!

Pension Funds? Unless you are over the pension eligibility age these are locked away out of reach. Some jurisdictions charge huge tax penalties for early access, while others refuse early access altogether. Subtract these from your accessible net worth.

Directly owned property? Property is an illiquid asset class. Even if you listed a property with a bargain basement price to obtain a “quick” sale, depending on your jurisdiction it is likely to take several weeks to complete. Should you suffer the misfortune of owning a property located in the UK for example, then a “quick” conveyancing process would be considered to be 3 months! Better deduct the value of these investments from your accessible net worth too.

Business ownership, private equity, and angel investments? Exiting these types investment can be time consuming, and the outcome far from guaranteed. Often due diligence is required, finances need to be audited, and so on. You guessed it, your accessible net worth should be minus the value of these investments also.

Unlisted managed funds? These financial vehicles can have early redemption penalties, or as investors in many of London’s leading commercial property REITs discovered last year it may not be possible to exit them at all. Remove these from your accessible net worth number.

Your accessible net worth figure is likely looking a hell of a lot smaller than you imagine your actual net worth to be.

Bonds, shares, cash and cash equivalents? Finally some good news, these you will likely be able to liquidate in short order for a fair market price.

However you’re not done yet, your estimated accessible net worth is still overly inflated.

Exiting investments is likely to incur brokerage charges, agency commissions, completion costs, stamp duty and the like.

If your investments have been performing then many of them will likely be subject to capital gains taxes.

When I applied these constraints to my own net worth, it turned out that were I to do a Carlos, then my accessible net worth was just 12% of my overall hoard.

Escapism, greedy investment bankers, De Niro acting with Pacino... WTF?

That is all well and good, I hear you thinking. But why have you stolen 10 minutes of my life you’re your artfully spun tale of idealistic escapism, evil investment bankers, Robert De Niro, Renee Russo and Al Pacino?

I’m glad you asked! The point is that the future is far from certain. The further out we plan the more uncertain those plans must be. Things change. Shit happens. Governments change the rules and move the goal posts.

We all plan on living long healthy lives.

Most of us dream about, and some of us even achieve the almost mythical goal of early retirement.

The common FIRE community mythology features the promise of endless globetrotting (or derbying around the countryside in a caravan), featuring many sleep ins and a complete absence of alarm clocks.

In practice life is unpredictable.
Life happens.
However in practice life is unpredictable. Families are complicated. Accidents happen. Health scares are far too commonplace to merely be a statistical outlier.

Does your life plan include paying for the nursing care of an elderly parent?

How about acting as the “bank of Mum and Dad” when your children want assistance buying a house or paying tuition or establishing a business to pursue their dreams?

Perhaps you’re less benevolent, so how about paying for bail or the legal defence of a close relative who gets themselves into hot water?

Does anyone actually plan to be on the receiving end of a cancer diagnosis, or suffering some form of debilitating injury?

So what?

In an ideal world none of these things will happen to you. However if just one (or more) of them actually does then your carefully laid plans of working for X more years, maintaining a savings rate of Y%, and retiring at age Z will potentially vanish. If that happens where will you be financially? How well placed are you to meet those kind of unexpected, yet commonplace, life events?

Just as it is important to monitor our spending, and track our net worth over time, it is also important to keep a realistic picture on what our accessible financial picture actually looks like. It would be easy to be lulled into a false sense of security by holding a fat pension account, when we may only be a moment away from a significant financially impacting event that all the pensions in the world could not help with.

Romanticism aside, I don’t think Carlos did the right thing. He skipped out on a bunch of bills. He left his colleagues in the lurch. In many respects he chickened out, fleeing in a mindless panic when he could have so easily organised a controlled exit at the cost of maybe one month of his life. Had he done so he would likely have had access to a much larger proportion of his net worth.

Postscript: What happened to Carlos?

A month or so after arriving in Costa Rica Carlos bought a dive boat, deciding that he quite liked the idea of running his own diving business.

12 months later Carlos’ business had gone bankrupt. It turned out that for a dive master he was a good computer programmer.

Last I heard Carlos still lives in Costa Rica, and was now working as a casual English teacher in San Jose.

Post-postscript: An amazing action sequence to reward you for reading to the end

While I was searching for the De Niro / Pacino 30 seconds scene above, I stumbled over a video of the amazing action sequence from the movie Heat. It has nothing to do with this post, but is definitely worth a look if shoot 'em up movies are your thing!

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  1. If I had to leave within 8 hours like Rene Russo, I'd probably only get at about 1% of my networth! If I had a couple of days like Carlos (I'm assuming he didn't leave on the same day and that it took a day or so for him to leave) then I reckon I can get hold of around 24%. Everthing else is locked in pensions and property.

    One of my friends recently revealed that her passport had been expired for over 3 years. I asked her "What happens if you need to leave the country in a hurry?" She asked why she would ever need to do that and that I'd obviously been watching too many Bourne movies!

    Maybe it's just me - not having a valid passport means that if the opportunity arose to travel, you wouldn't be able to take it, whether it's travelling for fun or leaving a bad job (like Carlos) or fleeing from the government/MI5/FBI etc...

  2. Thanks weenie. Actually Carlos went directly from his desk at work to Costa Rica. He didn't even stop at home to collect his toothbrush or a change of clothes. The fact that he was carrying his passport around with him suggests it was a little more than a spontaneous brain snap, but not much more.

    Of course these days (depending on the circumstances of the escape) it would often be possible to liquidate holdings from a distance.

    I agree with your passport sentiments. Anyone who has ever migrated or lived abroad for an extended period of time will vouch for just how valuable and important those books are!

  3. Excellent post, @SlowDad - thank you.
    It reminds me of a prodigy I once knew who made enough (at the vampire squid) to 'retire' by the age of 25; he bought a flat in central London, rented it out, and disappeared to Panama to sail around from adventure to adventure. Perhaps he met Carlos nearby...

    My other observation, as per trying to buy a house on a whim last year, is that even the supposedly-liquid-can-sell-it-tomorrow stuff can take a while to actually obtain the cash. I had almost 10 working days to obtain some funds that I had counted on 48 hours beforehand. Assuming you haven't got The Heat coming around the corner then 10 days still isn't too bad but be warned.

  4. Thanks FVL. One thing that is certainly constant in the world of high finance is delays, and mostly stupid delays at that. A great example is the last time I bought a property in the UK. I engaged the services of an "instant" international money transfer institution, who then slowed down the "instant" part by performing a BACS transfer from their own UK account to the my UK account once the money arrived from overseas. It would have been comically ludicrous if it hadn't nearly caused the deal to fall through!