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PERSONAL
FINANCE FOR
ENGINEERS
CS 007: SESSION 5
ASSETS &
NET WORTH
CS 007
LIQUIDITY
access to money when you need it
WHAT IS LIQUIDITY?
• How quickly can you get access to
cash when you need it?


• Market liquidity refers to the extent
a marketplace allows assets to be
bought & sold at stable prices.


• Accounting liquidity measures the
ease an individual or company can
meet their financial obligations with
the liquid assets available to them.


• Don’t underestimate the value of
liquidity. Liquidity matters.
WHY DOES LIQUIDITY MATTER?
• Liquidity is the only thing
that matters when you
need to pay for
something.


• Liquidity is the power to
take advantage of
investment opportunities.
LIQUIDITY & RETURNS
• Liquidity is typically inversely
correlated with returns


• Examples


• Cash is very liquid


• Private Equity is very illiquid


• Safety ≠ Liquidity


• 5 Year CD is safe,


but illiquid


• Tesla stock is liquid, but
volatile!
EMERGENCY FUNDS
a financial buffer to protect your goals
8: WHAT % OF AMERICANS HAVE $400 FOR EMERGENCIES?
• Commonly misquoted statistic.


• US Federal Reserve reported in 2017 that
40% of Americans do not have sufficient
savings to cover a $400 emergency
expense.


• Actual survey question reveals the
number is 12% that self-reported that
they could cover the emergency.


• Liquidity means having access to money
when you need it.


• Don’t underestimate the value of
liquidity. Liquidity matters.
WHY EMERGENCY FUNDS?
• Practical outcome of need
for liquidity


• Example of “mental
accounting” used for
financial health


• Goal is to protect your long
term assets / plans from
unexpected short term
needs.
HOW LARGE SHOULD AN EMERGENCY FUND BE?
• Standard recommendation is at
least 3 months of living
expenses in cash or cash-
equivalents


• Calculated based on impact of
losing employment


• National average is 3-6 months
to find a job of equal pay.


• Time increases in recession &
based on your seniority.
COMMON MISTAKES WITH EMERGENCY FUNDS
• Don’t focus on investment
return or opportunity cost.


• Think of it as a buffer, or as
insurance. Not as an asset.


• First on the list to fill, first to
refill if tapped for
emergency.


• Do not tap it for frivolous
needs. It is for emergencies.
ASSETS & LIABILITIES
what you own & what you owe
WHAT IS AN ASSET?
• Any resource with
economic value


• Financial assets are
investments in cash, bonds,
stocks, etc.


• Real assets are
investments in real estate,
collectibles, commodities,
etc.
DIFFERENT TYPES OF ASSETS
• Liquid vs. Illiquid


• Financial vs. Real


• Appreciating vs.
Depreciating


• Tangible vs. Intangible


• Debt owed to you
* https://www.wealthfront.com/plan
WHAT ABOUT HUMAN CAPITAL?
• Easy to argue that your
skills & capabilities are the
largest asset you have.


• Don’t ignore “intangible
assets” - sometimes they
are the best investments.


• Do remember that human
capital varies significantly
in liquidity.
* https://www.wealthfront.com/plan
WHAT ARE LIABILITIES?
• A liability is a financial
obligation, typically debt.


• Most common personal
liability is a loan.


• Common types


• Mortgage


• Auto Loan


• Student Loan


• Credit Cards


• Tax Liability
DIFFERENT TYPES OF LIABILITY
• Short term vs. Long term


• Secured vs. Unsecured


• Tax Liability
CREDIT SCORES
• Lenders report to 3 major centralized
credit agencies when you apply for debt,
receive debt, and when you pay off debt.


• Building a good credit score is essential
for qualifying for most loans. It can affect
other services too, as it is used for
identity verification.


• Issues that affect credit score: length of
history, on time payment, percent of
capacity utilized, new applications for
debt, bankruptcy.


• Credit Karma 💯


http://www.creditkarma.com
IS DEBT A BAD THING?
• Modigliani-Miller


market value is determined by
earning power & risk of
underlying assets, not by the
method of financing.


• Assumes no taxes, transaction
costs, bankruptcy costs


• Tradeoff Theory of Leverage


There is an optimal capital
structure.
SHOULD I PAY OFF ALL OF MY DEBT?
• More debt = more risk


• Not all debt is the same


• Compounding is not your friend with
debt, especially high interest debt.


• Some debt is subsidized (e.g.
Mortgage, Student Loans)


• Paying off debt can be emotionally
satisfying, but financially irrational.


• Paying off debt can improve savings
rates over time.
BALANCE SHEET
know your net worth
WHAT IS YOUR NET WORTH?
• Assets - Liabilities


• Total net worth includes all
assets.


• Liquid net worth excludes
illiquid assets & primary
home (and related liabilities)


• Do not confuse with cash
flow. Very different.
* https://www.census.gov/data/tables/2018/demo/wealth/wealth-asset-ownership.html
WHAT IS A BALANCE SHEET?
• A balance sheet is a financial
statement that summarizes a
companies assets, liabilities &
shareholders’ equity.


• Assets = Liabilities + Equity


(see, it has to balance)


• Common ratios


• Cash Ratio


• Quick Ratio


• Debt to Equity


• Asset Turnover


• ROA (Return on Assets)
* http://www.investopedia.com/articles/04/031004.asp?ad=dirN&qo=investopediaSiteSearch&qsrc=0&o=40186
CREATING YOUR PERSONAL BALANCE SHEET
• Very simple summary of a
personal balance sheet


• Some recommend
excluding primary
residence (and related
mortgage)


• Very different than income
statement, but useful for
evaluating progress
(excluding primary residence)
QUESTIONS
CS 007
WEEK 6: CREDIT & DEBT. DIGGING OUT.
• Different types of Debt:


Student Loans, Auto, Credit Cards,
Mortgage


• Secured vs. Unsecured Loans


• Loans & Rates


• Credit Scores


• Compounding in Reverse

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Stanford CS 007-05 (2021): Personal Finance for Engineers / Assets & Net Worth

  • 3. LIQUIDITY access to money when you need it
  • 4. WHAT IS LIQUIDITY? • How quickly can you get access to cash when you need it? • Market liquidity refers to the extent a marketplace allows assets to be bought & sold at stable prices. • Accounting liquidity measures the ease an individual or company can meet their financial obligations with the liquid assets available to them. • Don’t underestimate the value of liquidity. Liquidity matters.
  • 5. WHY DOES LIQUIDITY MATTER? • Liquidity is the only thing that matters when you need to pay for something. • Liquidity is the power to take advantage of investment opportunities.
  • 6. LIQUIDITY & RETURNS • Liquidity is typically inversely correlated with returns • Examples • Cash is very liquid • Private Equity is very illiquid • Safety ≠ Liquidity • 5 Year CD is safe, 
 but illiquid • Tesla stock is liquid, but volatile!
  • 7. EMERGENCY FUNDS a financial buffer to protect your goals
  • 8. 8: WHAT % OF AMERICANS HAVE $400 FOR EMERGENCIES? • Commonly misquoted statistic. • US Federal Reserve reported in 2017 that 40% of Americans do not have sufficient savings to cover a $400 emergency expense. • Actual survey question reveals the number is 12% that self-reported that they could cover the emergency. • Liquidity means having access to money when you need it. • Don’t underestimate the value of liquidity. Liquidity matters.
  • 9. WHY EMERGENCY FUNDS? • Practical outcome of need for liquidity • Example of “mental accounting” used for financial health • Goal is to protect your long term assets / plans from unexpected short term needs.
  • 10. HOW LARGE SHOULD AN EMERGENCY FUND BE? • Standard recommendation is at least 3 months of living expenses in cash or cash- equivalents • Calculated based on impact of losing employment • National average is 3-6 months to find a job of equal pay. • Time increases in recession & based on your seniority.
  • 11. COMMON MISTAKES WITH EMERGENCY FUNDS • Don’t focus on investment return or opportunity cost. • Think of it as a buffer, or as insurance. Not as an asset. • First on the list to fill, first to refill if tapped for emergency. • Do not tap it for frivolous needs. It is for emergencies.
  • 12. ASSETS & LIABILITIES what you own & what you owe
  • 13. WHAT IS AN ASSET? • Any resource with economic value • Financial assets are investments in cash, bonds, stocks, etc. • Real assets are investments in real estate, collectibles, commodities, etc.
  • 14. DIFFERENT TYPES OF ASSETS • Liquid vs. Illiquid • Financial vs. Real • Appreciating vs. Depreciating • Tangible vs. Intangible • Debt owed to you * https://www.wealthfront.com/plan
  • 15. WHAT ABOUT HUMAN CAPITAL? • Easy to argue that your skills & capabilities are the largest asset you have. • Don’t ignore “intangible assets” - sometimes they are the best investments. • Do remember that human capital varies significantly in liquidity. * https://www.wealthfront.com/plan
  • 16. WHAT ARE LIABILITIES? • A liability is a financial obligation, typically debt. • Most common personal liability is a loan. • Common types • Mortgage • Auto Loan • Student Loan • Credit Cards • Tax Liability
  • 17. DIFFERENT TYPES OF LIABILITY • Short term vs. Long term • Secured vs. Unsecured • Tax Liability
  • 18. CREDIT SCORES • Lenders report to 3 major centralized credit agencies when you apply for debt, receive debt, and when you pay off debt. • Building a good credit score is essential for qualifying for most loans. It can affect other services too, as it is used for identity verification. • Issues that affect credit score: length of history, on time payment, percent of capacity utilized, new applications for debt, bankruptcy. • Credit Karma 💯 
 http://www.creditkarma.com
  • 19. IS DEBT A BAD THING? • Modigliani-Miller 
 market value is determined by earning power & risk of underlying assets, not by the method of financing. • Assumes no taxes, transaction costs, bankruptcy costs • Tradeoff Theory of Leverage 
 There is an optimal capital structure.
  • 20. SHOULD I PAY OFF ALL OF MY DEBT? • More debt = more risk • Not all debt is the same • Compounding is not your friend with debt, especially high interest debt. • Some debt is subsidized (e.g. Mortgage, Student Loans) • Paying off debt can be emotionally satisfying, but financially irrational. • Paying off debt can improve savings rates over time.
  • 22. WHAT IS YOUR NET WORTH? • Assets - Liabilities • Total net worth includes all assets. • Liquid net worth excludes illiquid assets & primary home (and related liabilities) • Do not confuse with cash flow. Very different. * https://www.census.gov/data/tables/2018/demo/wealth/wealth-asset-ownership.html
  • 23. WHAT IS A BALANCE SHEET? • A balance sheet is a financial statement that summarizes a companies assets, liabilities & shareholders’ equity. • Assets = Liabilities + Equity 
 (see, it has to balance) • Common ratios • Cash Ratio • Quick Ratio • Debt to Equity • Asset Turnover • ROA (Return on Assets) * http://www.investopedia.com/articles/04/031004.asp?ad=dirN&qo=investopediaSiteSearch&qsrc=0&o=40186
  • 24. CREATING YOUR PERSONAL BALANCE SHEET • Very simple summary of a personal balance sheet • Some recommend excluding primary residence (and related mortgage) • Very different than income statement, but useful for evaluating progress (excluding primary residence)
  • 26. WEEK 6: CREDIT & DEBT. DIGGING OUT. • Different types of Debt: 
 Student Loans, Auto, Credit Cards, Mortgage • Secured vs. Unsecured Loans • Loans & Rates • Credit Scores • Compounding in Reverse