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Thursday, March 23, 2017

Thinking of my Net Worth

Posted by Robert on October 1, 2012

This is a guest post by Robert, who lives in Calgary and worked as a financial adviser before retiring at age 35. He is married, has three kids and has returned to school with the goal of eventually living and working overseas.

On a regular basis, Tim publishes his net worth here, showing the changes over time and giving an explanation for what caused the changes. While I don’t publish my net worth, I calculate it each quarter (four times per year). I see a number of benefits to keeping in mind the factors that cause changes to my net worth. Thinking in this manner can help to make better long-term decisions.

Most people, when making spending decisions, think only of how it affects their wallet. For example, if I’m carrying $100 and I want to buy lunch, I have to decide if I want to break a $20 and reduce the amount in my wallet by the cost of lunch. This type of decision is based on a short-term perspective of cash-on-hand. But I seldom carry any cash at all, and I’m not faced with the same decision when I use a credit card or a debit card. In fact, spending is pain-free when using plastic.

Further, making short-term decisions based on how much cash I happen to be carrying isn’t suitable for saving and investing decisions. For example, I have never thought: “I have five $20s in my wallet, I think I’ll deposit one to a savings account.” If you do this, I applaud you. But most of my transactions are completed electronically, so I only withdraw cash that I plan to spend. And with investments, it’s rare that any particular investment will put cash in my pocket. At the very best, it’ll put cash in my investment account, which I can transfer to my bank account before withdrawing at a bank machine. It’s too convoluted to consider in a concrete manner when debating alternate investment choices.

The preference is then to make spending, saving and investing decisions in terms of my net worth. First, I consider spending within the context of how it increases or decreases my net worth. There is a certain amount of fundamental spending (food, shelter, transportation, clothing) that is required to survive. (Without spending on food, my net worth would drop to $0 as my children inherit it ;) .) After that, would I prefer to own a new computer, or shares of Apple stock? (Disclosure, I don’t own Apple stock, but I wish I did.) I would also prefer to save than spend, unless the spending will improve my net worth either now or later.

The drawback that I see to taking a long-term view of how choices affect my net worth is something called “the wealth effect.” It means that as the real estate market drops, affecting my net worth, I feel less wealthy and I tend to spend less. It also means that my outcomes are affected by things outside of my control, especially the stock market. I compensate somewhat for this by accounting for my house and car on a cost basis, not revaluing them every quarter, but holding them at their original price (unless the market price is very probably much higher or lower).

How do you balance long-term and short-term thinking when making money-related decisions? Do you calculate your net worth?

Comments

7 Responses to “Thinking of my Net Worth”
  1. GPS says:

    I think this is where a monthly budget may be helpful. I am really ambitious with my saving targets, so I know I only have a small x amount for excess spending every month.

    A) Each paycheck I set aside my savings and investing amount.
    B) I make sure the rest there is enough for my monthly bills
    C) Then I have a figure in mind about how much left over I have for discretionary spending (such as lunch)

    For example, if I know I only have about $100 to spend on discretionaries, I’m much tighter in a month about where I might spend it (less on coffees and lunch and more with outings with friends. If I have MORE than what I usually spend a month on discretionaries (say $200), then I re-evaluate to see if I can put some of that towards a more ambitious savings goal.

    So for me, it’s less about if I want to break a 20 in my wallet, but more about having a plan and sticking to it.

  2. greg says:

    “How do you balance long-term and short-term thinking when making money-related decisions?”

    until I’m financially independent, basically as if I have almost no money – invest 70% of income.

    “Do you calculate your net worth?”

    at the end of every month

  3. CF says:

    For us, we have a budget which takes care of all our savings and leaves us a bit of money each month to spend however we wish. I like doing it like this because then, I don’t have to think about anything at all.

  4. We set goals every year and look at long term goals we set and revise if necessary. We budget and we mark down every expense so we know where our money is going. I’m sure we will budget until our time is up as it has helped us get to where we want to be at such a young age. As for Net Worth we calculate that each month and post it on the blog. It’s a way for us to keep motivated to strive to reach our goals and hopefully a way to motivate our fans to work towards attaining theirs. Mr.CBB

  5. Jacq says:

    Nope, don’t calculate the house, the SUV, the RV or anything that I’m not planning on selling in the near future. Investments only – mostly daily.

  6. Like CBB, we set goals every year.

    I don’t count my DB pension in my net worth actually. I also don’t include our cars.

    I hope to have a paid off home in another 9 years, and an investment portfolio in the mid 6-figures. That’s what makes up our net worth. We’ll see!

  7. Alsy says:

    I really look more at cash flow than net worth. At official retirement age, our household monthly income will come from government and ex-employer pension plans as well as our investments and savings.

    Between now and then, monthly cash flow comes from employment sources and investments to some degree (we’re in the semi-retired stage) Income goes up and down +- 30% on a monthly basis, tracking expenses monthly and planning for bumps is really the key for us.

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