The Separation Between Assets And Liquidity

01I think its about time we’ve cleared up the mass confusion concerning the difference between liquid wealth and assets. Usually, when I hear people discuss the wealth of someone else, they tend to believe that a person’s net worth is equal to the amount of cash they have readily available. For instance, if a person is discussing worth $1 Billion dollars, they believe that person has a billion dollars in the bank. But that’s not how that works. With that being said, I’m gonna attempt to make the distinction between liquid wealth and hard assets.

A few months ago, I read a book titled “How To Get Rich” by Felix Dennis. Mr. Dennis is a magazine publishing Magnate worth anywhere between $400-$900 Million Dollars (According to Mr. Dennis, he doesn’t know his net worth down to the penny because after you reach a certain level of wealth, its nearly impossible to keep track of it all. Billionaire J. Paul Getty said the same thing). In Mr. Dennis’ book, he presented wealth scales. In one scale, he measured a person’s level of wealth by the amount of cash that person has on hand (or their ability to quickly raise that amount of cash). In the second scale, he measured a person’s wealth by the amount of assets they own. By assets (both tangible and intangible), we’re talking stocks/equity in a company (your own company or someone else’s), securities of any type, real estate, land, precious metals, royalties, etc.

Presented below are both tables.

Figure 1: Wealth Measured By Cash-in-Hand or Quickly Realizable Assets

  • $100,000-$400,000: The comfortable poor
  • $400,000-$1,000,000: The comfortably off
  • $1,000,000-$2 million: The comfortably wealthy
  • $2 million-$10 million: The lesser rich
  • $10 million-$30 million: The comfortably rich
  • $30 million-$70 million: The rich
  • $70 million-$100 million: The seriously rich
  • $100 million-$200 million: The truly rich
  • Over $200 million: The filthy rich and the super rich

Figure 2: Wealth Measured By Total Assets (True Net Worth)

  • $2-4 million: The comfortable poor
  • $4-10 million: The comfortably off
  • $10-30 million: The comfortably wealthy
  • $30-80 million: The lesser rich
  • $80-150 million: The comfortably rich
  • $150-200 million: The rich
  • $200-400 million: The seriously rich
  • $400-800 million: The truly rich
  • $800 million – $1.998 million: The filthy rich
  • $1.998 million and Above: The super rich

According to this table, a person who can touch between $100,000-$400,000 is technically a millionaire, which I have to agree with. The reasoning behind that is two-fold. On one hand, a person with $100k liquid is able to leverage that $100k, putting spending power in the millions of dollars. In our credit run society, a person with $100k cash can control assets in the millions. If you’re into Real Estate, think about how many properties you could control with $100k in your pocket. Or, if you’re into the financial markets, think about how much futures contracts you can buy on margin with $100k and how much that entire deal is worth. Then on the other hand, if a person has $100k cash, chances are, that person already has hard assets in the millions but are parking the rest of their cash into those assets. Some people may wonder “How is it that a person who’s worth $2 billion dollars can lose $500 million dollars in a month’s time?” That is because that person’s wealth is largely on paper and tied up in assets. That person didn’t lose $500 million cash. For all we know, their portfolio could be back up in a month with a $100 million dollar profit, putting their net worth at $2.1 billion dollars.

The table also says that a person isn’t rich until their liquid assets reaches $30 million dollars. I’m inclined to agree, but that’s definitely up for debate. To me, it would depend on what type of lifestyle a person wants to live. If a person wants a mega-mansion on tens of acres of land with all of the amenities, own a private jet, own cars worth hundreds of thousands and even millions of dollars, employ butlers/maids, etc., then $30 million dollars is definitely that number. Remember, the scale shows that a person with $30 million dollars in liquid cash is usually worth $150-200 million dollars. However, if a person just wants a mini-mansion in a gated neighborhood, a luxury car (BMW, Mercedes, Jaguar, etc.), traveling first class on major airlines, complete financial security, etc., then $1 million-$2 million dollars liquid might be the number for that person. But even with that group, their spending power is $10 million-$30 million dollars and/or they have assets ranging in that amount.

Its been said that a person’s income is usually within 10% of their net worth. If we were to look at table 2, and take “the truly rich” for example. This group has assets ranging from $400-800 million dollars. It’d be safe to say that this group probably has an income of about $40-80 million dollars a year! Maybe lower, maybe higher. If a person in the truly rich category happens to be a hedge fund manager or involved in the financial markets in some way, its possible that they’re bringing home $100+ million dollars. By the way, no one who’s worth that kind of money is keeping their entire net worth in the bank. That would just be stupid. Banks themselves don’t keep depositors’ money in the bank. Keeping money tied up in assets is safer. Besides, good investments in appreciating assets are a better hedge against inflation than the bank. Only money that should be in the bank is the money needed for living expenses and other spending — not every dollar you own.

Conclusion: I hope this article has cleared up the confusion pertaining to liquid wealth and assets. You should now be able to more accurately measure your own wealth. It should also be easier for you to determine where you want to be in the future financially. As you can see, the name of the game is collecting assets.


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