Posted by Tim Stobbs on January 4, 2008
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.