I agree that it's all relative. It really shouldn't be a bragging point for sure. But it makes for a great motivator when you are overall in the red! Crossing the threshold into black is like a monkey off of your back. It's a great point though that any number for your net worth needs to be seen in a bigger picture of things.
FourPillars
· 1 year ago
Great post. Very similar to the one I was thinking of writing :)
When I first became "financially aware", I kept track of net worth because it was a great motivator for me. However at that time my net worth was basically made up of my debts so my "net worth" was really a proxy for my debt. Later on I stopped calculating the net worth because the changes in net worth didn't track my actions ie house value/markets might go up or down which had nothing to do with my contributions or debt payments.
As you also mentioned, a more relevant calculation is to look at the income you can derive from your investments and compare that to the income you need to live on.
Mike
Hunter Nuttall
· 1 year ago
Steve, I definitely agree that not knowing how it's calculated is a big issue. I count home equity in my net worth, because to me the ability to cash in is not a consideration of net worth. (I have many investments that I know I will never sell, but I count those as well.) If you want to buy a franchise, your home equity may very well not count towards the minimum net worth requirements, specifically because you can't cash it in.
On the other hand, I don't count "stuff" in my net worth. When I paid cash for my car, my net worth took an instant $14,000 hit. But some people would include cars, furniture, TVs, etc., making for very inconsistent comparisons.
Maybe I think net worth is a bigger part of the picture than you do, but I agree that it's just part of it.
rocketc
· 1 year ago
Networth might be more valuable for those of us who have high levels of debt. It gives a more positive picture of our financial situation than just looking at the pile of cash that we owe - possibly false picture - but motivating never the less.
Patrick
· 1 year ago
Steve, I think this is a great article, and very much in line with my views (although I did use of house in the calculation). I don't often write about net worth, especially my own, because as you mentioned, it is arbitrary. However, I think knowing certain things such as the total value of your retirement holdings, cash flow producing assets, and other sources of money or equities is very important, especially when preparing for retirement. One of the things most people do not include in their net worth is their income from their job or other sources, which is not technically part of your net worth, but is most often the most valuable asset you have.
guinness416
· 1 year ago
As long as you know how your own net worth is calculated, that's all you need for comparison quarter to quarter, no? I do keep track of it, though somewhat haphazardly, as both a motivator and an occasion to sit down and check all my accounts (I have accounts of one sort or another in four different countries...) to make sure nothing's going wrong in any of them. If I graphed it, it would look insane I'm sure, in the last few years I've sold an aprtment in one city, bought a house in another, done some renovations, imported a car, gone from one to two to one households, and on and on. But I stop short of tracking market price for my house because that does seem a pointless exercise to me, and frankly I just couldn't be bothered. And like Hunter, while I have a relatively detailed home inventory for insurance I don't calculate any personal belongings ... which is always the most curious line item for me in any of the published net worth calculations, some people including $50,000 and some $5,000.
FourPillars
· 1 year ago
One of the things most people do not include in their net worth is their income from their job or other sources, which is not technically part of your net worth, but is most often the most valuable asset you have.
Patrick - interesting statement.
A few years ago I almost got laid off from my job and I went through a quick exercise where I looked at my assets (that I could earn income from), debts, costs etc and realized very quickly that my income is indeed my biggest asset.
This might not be true for someone who is getting close to retirement.
Mike
Patrick
· 1 year ago
Stay tuned, Mike. I plan on writing about that for tomorrow's article. ;)
The Investor's Journal
· 1 year ago
I think we all know net worth is just a bragging right. It means little in terms of knowledge of money, means to grow and protect your money, etc.
moneymonk
· 1 year ago
Net worth is never perfect, we can only guessimate
ed
· 1 year ago
Certainly a very interesting and informative post in the least. As I read it I find myself thinking back to one of my fiance's former bosses.
He essentially generated all of his income with his existing bank account. He bought and ran franchises, more or less. He was the kind of guy really concerned about his net worth and how it reflected onto him as a person.
He even went so far as living in a ritzy area, Bedford, NH. But his home paled in comparison to all those around him (200k range, when everone else has 800k+)
In the end of things, no matter how much he was actually worth he couldn't come up with the liquid assets to open up any of the big cash cow franchises, like McDonalds, Dunkin' Donuts, et cetera. Every cent he had was tied and hard to cash out.
So you certainly make a point, and it's a breath of fresh air to hear someone blogging about net worth like a tool, versus a score in Pacman.
Early Retirement Extreme
· 1 year ago
I think net worth is about as useful as equity in evaluating a company. I have had some fun lately in evaluation my finances as if I was a company e.g. making an equivalent balance sheet, income statement and cash flow statement. Rather than net worth (which I also hate, when it is used as a bragging point) I think the pertinent numbers are profit margin (which is the equivalent of savings rate), and free cash flow. For home owners, debt to equity is also important. Overall, I think it comes down to what kind of financial lifestyle one leads. For instance, if I had millions, I wouldn't care about income since I could never spend that amount of money anyway, whereas for early retirement purposes, the profit margin is an important measure of financial independence and the free cash flow says something about post retirement capabilities.
remodelingthislife
· 1 year ago
This sounds like the conversation hubby and i had about net worth last week. I think it can be motivating on an individual personal level to increase your net worth but when comparisons start flying, it's just not a very useful tool.
Great post!
SavingDiva
· 1 year ago
I LOVE to calculate my networth. I wouldn't say that it's a valuable tool. However, calculating my net worth at the end of every month makes me re-evaluate my investment decisions (currently only my retirement accounts and mutual fund).
I agree that net worth isn't a great comparison tool (plus, I'd sounds like a total tool if I said that I was worth $20k at dinner) with others. However, I think it's a great tool at comparing your current situation to your past situation.
rocketc
· 1 year ago
Too bad "tool" isn't a good google key word . . . :)
I am going to announce my networth at dinner tonight. I wonder what my 3 year old will think?
Dasha
· 1 year ago
I just think of all the Jane Austen novels when I think of net worth.
Net worth = value on marriage market
:)
Steve
· 1 year ago
Great comments! I should point out that I don't dismiss net worth's value as a motivational tool. Weight loss is again a good comparison. If I tell you I lost 50 pounds, it makes a big difference if I weighed 250 pounds or 600 pounds as to whether it's an impressive loss.
I do think net worth is helpful as a motivational tool. I just think that it's overused as a personal finance tool. If you work in finance, you realize that equity is only one measure of a company's health. A million other things indicate growth or stagnation or decline: cash flow, return on equity, profit and loss, earnings before taxes, etc. I personally have tried to shift my thinking to "earning power" - what could I generate in cold hard cash from my assets? That's the true measure of financial freedom.
fathersez
· 1 year ago
I also lived in a false world for a while basking on my net worth. (with house included).
I agree that cash flow generation should be a better metric to focus on.
This is what we should keep making better.
Now I just have to figure out how.
deepali
· 1 year ago
I don't calculate networth per se, but I do keep separate running tabs of my debt, my retirement, and my savings accounts. These will give me a good snapshot. Of course, it depends on which day that snapshot is taken!
Having studied statistics, I find a moving average to be more useful (also a useful tool for weight loss, and google will do that one for you). It gives me the "true value" amongst all the noise. It has its limits, though, because it would depend on which statistical model would be used (I like a simple regression). It also doesn't answer the question of whether to include the house, though it does address the income question.
The Financial Blogger
· 1 year ago
It is true that you can argue forever about what should be included in your net worth or not. However, if you stick to the same calculation years after years, it could be a great help in order to design a financial plan.
Your net worth progress is an indicator (not the only one) of your financial health. If it's stable or decreasing, then you should take a closer look at your investment portfolio or your budget.
You also have to determine why your net worth is increasing. if the house pricing is going up in your area or if you made a major capital gain for one year, you might not be doing so well in reality.
Here are more thoughts about including your property or not in your net worth : link.
(Note from Brip Blap: the URL was too long for the comment format, so I HTMLed it. Still directs to same post).
moneygardener
· 1 year ago
Great post.... but I disagree with almost every argument you've made.
I will endeavour to post about this on my blog in the next week or so..
hank
· 1 year ago
I like it - and agree to a point; but at the same time it has made me very aware of what and where my money is going. I think it can take a huge tangent when you start to say WHAT is defined in it. If you keep it simple, I think Flexo might have mentioned it months ago in a post I read, net worth is what you're worth if you had to sell everything you own right this minute. If you did, how much money would you have?
For me it is more of a bookmark on my financial "novel"...
moneygardener
· 1 year ago
Here is my rebuttal (Note from Brip Blap: the URL was too long for the comment format, so I HTMLed it. Still directs to same post).
traineeinvestor
· 1 year ago
As interesting as the post is , I'm with moneygardener in respectfully disagreeing with just about everything in the post.
The fact that "net worth"may be measured differently by different people and different amounts may have different relative meanings to different individuals does in no way detract from its usefulness as a personal finance tool. For me, net worth calculation is the primary measure of progress towards my retirement goal (although other measures are also relevant).
Steve
· 1 year ago
I'm perfectly OK with disagreements with my conclusion. I think my point was more that it doesn't serve much purpose as a comparative tool, and it depends heavily on factors that aren't included in the calculation as to whether your net worth is "good" or "bad."
JimB
· 1 year ago
This is a really great post. Too many people use "net worth" to keep score in life and many investment firms use it as a marketing tool. It clearly changes over time depending on which asset classes you are invested in.
Steve
· 1 year ago
Thanks, JimB. That's another avenue I didn't really even get into - that the term "net worth" is being used as a marketing tool to make us feel inadequate. My net worth isn't as high as Fred's!! Let's invest in pork belly futures!
Good point!
Lazy Man and Money
· 1 year ago
I think it has value to the individual which you touched on at the end of the article. It is difficult to understand what it means to other people unless they know the other details that you mentioned.
In my case, I'm pretty open with most of the extra information. People know what I'm invested in (to some degree), how it's calculated, and where I live.
7million7years
· 1 year ago
Halleluja Brother! Net Worth don't mean no hill o'beans because you have to guess at the valuations of all of them little ol' businesses and investment real-estate that produce all of that sweet cash.
Mah own little ol' net worth just kept climbin' and climbin' as I sold off those little ol' income-producing assets and businesses to big, fat corporations with deep pockets ... suggest y'all do the same using some of the same tricks o'the trade that ah did ... c'mon over, pull up a chair, and sit by the fire and ah'll tell y'all about 'em ...
Know The Ledge
· 1 year ago
I've always struggled with the importance of the net worth number and it's relevance. It's definitely all relative, and think that a different calculation based on your level of financial freedom might be more prudent. That could take into account your regional differences as well as give you some practical information to use.
It would be less a figure to compare between you and others, and more a figure to compare between you and yourself, which makes it ultimately more valuable to your financial progress.
Moneymonk
· 10 months ago
I wrote a post close to this a while back.
I just think cash flow is always better than net worth. It is cash flow that will keep you going.
net worth is relevant as a continuing benchmark for your own purposes...say every 6 months to a year....though using it to compare yourself to others is rarely useful. Risk and the extent of your diversification would eventually reveal themselves though either rapidly growing or shrinking net worth as people who were largely or solely invested in their primary residences have found out. Also, one would assume that assets with positive cash flow would also reveal themselves as that cash flow is used to save, invest or buy other assets...if it is spent on crap then it is irrelevant anyway!
All Comments
When I first became "financially aware", I kept track of net worth because it was a great motivator for me. However at that time my net worth was basically made up of my debts so my "net worth" was really a proxy for my debt. Later on I stopped calculating the net worth because the changes in net worth didn't track my actions ie house value/markets might go up or down which had nothing to do with my contributions or debt payments.
As you also mentioned, a more relevant calculation is to look at the income you can derive from your investments and compare that to the income you need to live on.
Mike
On the other hand, I don't count "stuff" in my net worth. When I paid cash for my car, my net worth took an instant $14,000 hit. But some people would include cars, furniture, TVs, etc., making for very inconsistent comparisons.
Maybe I think net worth is a bigger part of the picture than you do, but I agree that it's just part of it.
Patrick - interesting statement.
A few years ago I almost got laid off from my job and I went through a quick exercise where I looked at my assets (that I could earn income from), debts, costs etc and realized very quickly that my income is indeed my biggest asset.
This might not be true for someone who is getting close to retirement.
Mike
He essentially generated all of his income with his existing bank account. He bought and ran franchises, more or less. He was the kind of guy really concerned about his net worth and how it reflected onto him as a person.
He even went so far as living in a ritzy area, Bedford, NH. But his home paled in comparison to all those around him (200k range, when everone else has 800k+)
In the end of things, no matter how much he was actually worth he couldn't come up with the liquid assets to open up any of the big cash cow franchises, like McDonalds, Dunkin' Donuts, et cetera. Every cent he had was tied and hard to cash out.
So you certainly make a point, and it's a breath of fresh air to hear someone blogging about net worth like a tool, versus a score in Pacman.
Great post!
I agree that net worth isn't a great comparison tool (plus, I'd sounds like a total tool if I said that I was worth $20k at dinner) with others. However, I think it's a great tool at comparing your current situation to your past situation.
I am going to announce my networth at dinner tonight. I wonder what my 3 year old will think?
Net worth = value on marriage market
:)
I do think net worth is helpful as a motivational tool. I just think that it's overused as a personal finance tool. If you work in finance, you realize that equity is only one measure of a company's health. A million other things indicate growth or stagnation or decline: cash flow, return on equity, profit and loss, earnings before taxes, etc. I personally have tried to shift my thinking to "earning power" - what could I generate in cold hard cash from my assets? That's the true measure of financial freedom.
I agree that cash flow generation should be a better metric to focus on.
This is what we should keep making better.
Now I just have to figure out how.
Having studied statistics, I find a moving average to be more useful (also a useful tool for weight loss, and google will do that one for you). It gives me the "true value" amongst all the noise. It has its limits, though, because it would depend on which statistical model would be used (I like a simple regression). It also doesn't answer the question of whether to include the house, though it does address the income question.
Your net worth progress is an indicator (not the only one) of your financial health. If it's stable or decreasing, then you should take a closer look at your investment portfolio or your budget.
You also have to determine why your net worth is increasing. if the house pricing is going up in your area or if you made a major capital gain for one year, you might not be doing so well in reality.
Here are more thoughts about including your property or not in your net worth : link.
(Note from Brip Blap: the URL was too long for the comment format, so I HTMLed it. Still directs to same post).
I will endeavour to post about this on my blog in the next week or so..
For me it is more of a bookmark on my financial "novel"...
(Note from Brip Blap: the URL was too long for the comment format, so I HTMLed it. Still directs to same post).
The fact that "net worth"may be measured differently by different people and different amounts may have different relative meanings to different individuals does in no way detract from its usefulness as a personal finance tool. For me, net worth calculation is the primary measure of progress towards my retirement goal (although other measures are also relevant).
Good point!
In my case, I'm pretty open with most of the extra information. People know what I'm invested in (to some degree), how it's calculated, and where I live.
Mah own little ol' net worth just kept climbin' and climbin' as I sold off those little ol' income-producing assets and businesses to big, fat corporations with deep pockets ... suggest y'all do the same using some of the same tricks o'the trade that ah did ... c'mon over, pull up a chair, and sit by the fire and ah'll tell y'all about 'em ...
It would be less a figure to compare between you and others, and more a figure to compare between you and yourself, which makes it ultimately more valuable to your financial progress.
I just think cash flow is always better than net worth. It is cash flow that will keep you going.
http://www.moneymonk.net/2008/03/net-worth-is-j...