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The Liquidity Line: Distinguishing Net Worth from True Financial Wealth

Investment

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5.5.22 |

Joseph Darby

What separates poor and rich millionaires? Liquidity

For many New Zealanders, particularly those who have risen through demanding professional careers or built successful private practices, the concept of net worth serves as the primary benchmark of financial success.

Net worth is the simple calculation of assets minus liabilities. Net worth is a comforting, singular figure. It is the number whispered at barbeques and dinner parties in high-end suburbs, a tacit measure of having 'made it.' Yet, this seemingly definitive calculation often masks a deeper, more fundamental truth in personal finance: the crucial difference between merely being wealthy on paper and possessing true financial power.

Two people can have the same net worth, for instance $2 million, and live entirely different financial realities. This difference is defined by one word: liquidity.

Liquidity Defined

Liquidity refers to how easily and quickly an asset can be converted into cash without significantly affecting its value.

In simpler terms: liquidity is your ability to access money when you need it, without jumping through flaming hoops or selling the family bach.

Cash in the bank? Highly liquid.
A rental property in Tauranga? Not so much.

In a world of technological innovation, unstable interest rates, and economic uncertainty, liquidity is king. Or queen. Or whichever royal title you prefer.

The opposite of liquidity is illiquidity.

Examples Of Liquidity, and Illiquidity

In New Zealand especially, much wealth is tied up in illiquid assets. At first you might think the main culprit behind illiquidity is the primary residence. After all, owning a nice home is awesome, especially if you get to work from home or are retired. There are other illiquid assets worth mentioning, consider:

KiwiSaver Schemes. Highly illiquid for those of younger ages, as they are usually inaccessible until age 65.
Small businesses and farms. Difficult and often costly to sell. Some business sales will involve lengthy earnout periods where the former owner needs to stay on in the business, under new ownership.
Property investment. Difficult to sell when compared with shares or bonds, for instance, and which comes with plenty of selling costs.

While these can all be great investment assets, they cannot be converted into cash without a significant delay, substantial transaction costs, or, critically, a material loss in value. If you’re totally illiquid it can leave you asset-rich but lifestyle-poor, among other issues.

Our team consistently come across many high-income, asset-rich individuals are financially precariously positioned. (Or, those who haven’t had a high income but who are financially well off after having made disciplined financial choices over a period of many, many years). These people may technically be millionaires, even multi-millionaires, but their wealth is cemented in place, fixed and immovable. The truly wealthy are not simply those with the largest net worth, but those with the highest degree of accessible, flexible capital. They are the Liquid Millionaires, a class apart from their equally asset-rich, but ultimately restricted, counterparts: the Illiquid Millionaires.

This difference is not academic, it’s practical. It dictates flexibility, resilience during market volatility, and the speed at which opportunities can be seized. For the sophisticated, time-poor professional (think a busy managerial professional, doctor, experienced corporate lawyer, or successful SME owner) understanding this distinction is vital for moving from a position of successful accumulation to one of genuine financial mastery.

The Property Investment Drawback: An Examination of Illiquidity

In the New Zealand context, the most common culprit is residential property.

The typical adult in New Zealand, according to recent figures, has a large portion of their personal wealth anchored firmly in property. While this reliance on real estate has been a foundational pillar of Kiwi prosperity for decades, it creates an illiquidity problem. A home is a wonderful thing, providing security and shelter, but it offers cash flow only when sold, which is a process laden with frictional costs including agent fees, legal costs, staging costs, and the inevitable time delay which comes with the sale of a piece of real estate.

To illustrate this core concept, let’s consider two theoretical high-net-worth households.

Two Millionaires Walk Into a Bar…

Let’s look at two theoretical couples. Both have a net worth of $2 million and the same annual household income. But their financial lives couldn’t be more different.

Millionaire A: The Illiquid Millionaire

Owns a debt-free home worth $1.2 million
Has $300,000 in KiwiSaver (locked until retirement)
Holds a legacy superannuation fund worth $500,000 (locked until retirement)
Has minimal cash on hand

This Illiquid Millionaire is the picture of financial security to a layperson. Their house is paid off, they have a substantial KiwiSaver balance, and they sleep soundly knowing they owe nothing to the bank. But their assets are essentially untouchable.

Compare this with Millionaire B.

Millionaire B: The Liquid Millionaire

This household has the exact same net worth, but their finances tell a story of choices:

Owns a home worth $1.2 million with a $400,000 mortgage
Has $200,000 in KiwiSaver (locked until retirement)
Holds $950,000 in a diversified, accessible investment portfolio
Keeps $50,000 in cash reserves

Same net worth. Same household income. Vastly different realities.

Millionaire A might feel “rich” on paper, but struggles to access funds for contingencies, opportunities, or even a spontaneous trip to Queenstown. Millionaire B, meanwhile, has flexibility, optionality, and the ability to pivot when life throws curveballs or golden opportunities.

While Millionaire B still carries a mortgage, the Liquid Millionaire has about half their assets which can be converted to cash within days, not months. This gives them immense optionality.

Related material:

The Wisdom of Excess: Liquidity as a Financial Weapon

The world’s most successful investors treat liquidity as an active component of their financial planning. This translates into practical advantages:

Opportunistic Investing: When markets experience sharp declines (an inevitable occurrence), the Liquid Millionaire is positioned to inject capital into their portfolio, buying quality financial assets at a discount. The same goes should an opportunity arise, perhaps a relative’s successful small business just needs a little extra cash to scale an opportunity and offers a shareholding. The Illiquid Millionaire, conversely, can only watch these opportunities pass by.
Insulation from Volatility: When a short-term need arises, the Liquid Millionaire can draw from cash or their fully accessible portfolio, while illiquid assets, such as real estate or private business interests, remain untouched and continue their longer-term appreciation cycle. This avoids the severe financial impact of forced liquidation.
Flexibility in Life Planning: Liquidity enables rapid transitions. This might be funding an immediate executive education programme, a considered change in life path, even financing an unexpected but necessary global family relocation!

Financial academics and market analysts consistently underscore the non-negotiable nature of liquidity. The principles that govern global financial markets are equally relevant at the household level. Illiquid non-financial assets, such as real estate, locked-in KiwiSaver or superannuation funds, or even collectible assets such as artwork, require a significant time and effort commitment to convert to cash, and often trade at a discount (a liquidity premium) because of that lack of swift tradability.

The Price of Immobile Capital

The greatest risk associated with an overly illiquid position is forced liquidation. This occurs when an unexpected event, such as a major health crisis, a sudden career interruption, legal action, or something else forces the sale of an asset at a disadvantageous time.

Consider the classic New Zealand example: the asset-rich household that suddenly needs cash to cover one of the eventualities listed above. If they need $100,000 urgently, and at a time when the property market is underperforming, they may be forced to sell their property at a significant loss because they have no liquid cash reserves to cushion the blow. The Illiquid Millionaire is at the mercy of the market cycle; they must sell when the market dictates, not when they choose.

Perhaps unsurprisingly, as people become wealthier, they experience such events a few times. They then tend to increase the overall allocation of their wealth to financial assets, which are usually highly liquid. Recent Stats NZ research suggested:

“The wealthiest 20 percent of households held the largest share of their wealth in financial assets such as pension funds, shares, and investment funds. The remainder of households held the largest share of their wealth in non-financial assets such as real estate and durable goods.”

Added to that, especially in a New Zealand context, because so much household wealth is held in property, there is a concentration risk: if property values stall or fall, many households may feel less financially secure even if net-worth remains high on paper.

The Bottom Line: Illiquidity Can Lead to Poor Millionaires

Too often, assets can become burdens, demand attention and restrict true financial freedom.

Freedom and flexibility are the ultimate financial luxury.

A poor millionaire is someone worth over $1 million but unable to access much, if any, of their wealth. In other words, their net worth is highly illiquid. A unexpected event such as a job loss could quickly put them in peril. They can’t change trajectory easily, even if a great opportunity arises.
In contrast, a rich millionaire is also worth over $1 million but can easily tap into their assets. They’re able to seize opportunities and are resilient to financial shocks. Not only are they financially well-off, but they’re also wealthier mentally. The thought of financial destruction rarely crosses their minds, but financial freedom does.

The Illiquid Millionaire has built a castle; the Liquid Millionaire has built a well-fortified port complete with a fleet ready to sail at a moment’s notice.

If you find yourself slipping into the illiquid trap, or are already trapped, your financial position might be powerful but restricted. The goal is not just to be worth more, but to be a truly free. The next step is simply to gain clarity.

Are you ready to build wealth you can actually use?

Get in touch with the team here at Become Wealth to initiate a confidential and complimentary review of your complete financial position, with the aim of getting your finances to provide you the freedom you deserve.