What’s the Point of Using Net Worth?

I read a post just the other day by Brip Blap on whether a net worth was useful to calculate at all. Overall I have to agree with a few of his points, but generally the thing that stuck me the most was “knowing your net worth doesn’t tell you everything you need to know about your financial position. It’s part of the picture, but definitely a small part.”

This is an obvious thing when you think about it, but I see sometime people focus too much on the details and forget your net worth should only be used to like a compass. It’s only use is to tell you if you are heading in the right direction in a broad general basis. Other than that, it’s just a number.

This is especially true in my net worth posts, as what I post isn’t my true net worth. Yes folks I’ve been lying to you all since the start. Shocking isn’t it? Yet in a way it is completely necessary. You see everyone tends to calculate their net worth a little different, if you don’t believe me go read the comments on this post from Million Dollar Journey. So when I started my blog I decided to calculate my public net worth in its current fashion, once it was done I was stuck with it. After all your compass doesn’t work if you keep changing the markings on it. Yet as I discovered problems with the net worth calculation I’ve fix it for my personal use. Hence my true net worth has never been or ever will be published on this blog since it provides no useful comparison to my public net worth.

So if I’m aware of all these problems with using my net worth why would I continue to post it?  Well I need some sort of metric to measure my progress going forward and since asset accumulation and debt reduction are important to my plan I decided to use net worth.  When I hit retirement, the rules change.  I’ll be more interested in my cash flow as I change my portfolio from growth to more income production.  Since at that point the amount of the assets don’t matter too much as compared to the amount of income they can produce.  For example, if you have a million in net worth it can fluctuate by $20,000, which only represents a 2% change, but as long as it keeps providing your yearly income in retirement, you can’t get too excited about it.

In the end you might not bother calculating your own net worth since in some cases it doesn’t provide much information.  You might be more interested in your yearly passive income, retirement portfolio value or perhaps your cash flow.  Each person should evaluate what you are trying to do and then use a metric that works for your own goal.  Don’t just follow the blogger crowd and use your net worth, it might lead you off track from your goal.

7 thoughts on “What’s the Point of Using Net Worth?”

  1. Despite a growing interest in personal finance I’ve never really stopped and thought about my total net worth – maybe that will change as it grows to more than the value of my sub-$10K car.

    Right now I’m a lot more interested in my “cash worth” – the totals of my bank, credit card, investment, and loan accounts. All of them apply directly to my current situation (even registered accounts have a short-term impact thanks to the Home Buyer’s Plan) so watching those four categories and the total change from month to month gives me a good feel for where I’m going and how well I’m doing.

    This month I’m hoping to get a positive total for the first time in 2 years!

  2. I would totally disagree: your net worth is a BIG part of your financial progress and financial position. There are other measures, but don’t minimize the value of your net worth as a measurement.

  3. I got bored of looking at this number monthly, it really didn’t change much except when my house appreciated, so I stopped calculating it. Now I am more concerned about how much debt we are paying off, which of course, increases our net worth. I think I will still calculate it from time to time though to see how we are doing.

  4. Just a reminder that a happy retirement is dependent on a number of factors as detailed in my book How to Retire Happy, Wild, and Free (Retirement Wisdom That You Won’t Get from Your Financial Advisor).

    In Chapter 1, I give eight good reasons why the large majority of retirees, whether they live in Canada, the U.S., or other Western
    nations, can live on far less than 80 percent of their pre-retirement income. Indeed, government statistics indicate that retirees live
    comfortably on 45 percent to 62 percent of their pre-retirement income.

    For those interested, I actually give away over half of How
    to Retire Happy, Wild, and Free
    – the top half – on my webpage Creative
    Free E-books
    at the Real Success Resource Center. (www.real-success.ca)

    Ernie Zelinski
    Author of How to Retire Happy, Wild, and Free (over 75,000 copies sold and published in 7 foreign languages)
    Featured on The Retirement
    Quotes Café
    at http://www.retirement-quotes.com

  5. I certainly appreciate the commentary on my post! I think that your closing sentences said it all: “Each person should evaluate what you are trying to do and then use a metric that works for your own goal. Don’t just follow the blogger crowd and use your net worth, it might lead you off track from your goal.” That was basically the point I was trying to make, but you made it much more succinctly! I guess my concern with net worth is seeing it used as a “score” when it’s really just one out of 15 or 20 measurements critical in understanding your financial position.

    I just calculated my net worth for the first time in years this week. I guess it was interesting, but it hasn’t been – and still won’t be – a key metric for me. But that’s just me!

  6. MG,

    I read your post. It’s a nice debate and I see what you are trying to get at. Thanks for pointing it out as I had yet to read it.

    SP,

    Thanks for providing a good example of what I’m getting at. Sometimes a net worth isn’t all that useful depending on your goal.

    Cole,

    I’m not trying to minimize the value of a net worth statement. I’m trying to point out depending on what you have for a goal it can be misleading. For example, net cash flow when building passive income may be a more accurate measure of your goal.

    Brip Blap,

    Thanks for your comment. It’s good to hear we were both trying to get to the same place with our posts. It was a interesting read.

    Tim

Comments are closed.