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.
Here is my net worth from Dec 31, 2007 (yes just a little late I know).
Old Work Pension (LIRA) $11,800
New Work Pension $5700
Wife’s RRSP $6100
Wife’s Investment Account $7400
My Investment Account $2800
High Interest Savings Account $5900
Line of Credit $2900
Therefore my net worth now stands at $215,000 for the end of 2007. That is an increase of +$13,700 or 6.8% from my last update.
Regular readers might notice that I have a few changes to my net worth statement. I’ve added my investment account and a balance to my line of credit to reflect my decision to leverage invest. I’ve decided to keep this amount small to see how comfortable I am with the entire thing. So far I’m down about $100 on this experiment.
Over the holidays most real estate markets slow to a crawl, but I lucked out and found a couple of comparable houses to mine which made me feel comfortable increasing my house market value up slightly.
The other increases were the pension account where I’ve rolled in my new pension amounts and the high interest account where we are building up cash to pay for my wife’s maternity leave and my parental leave in the spring. All of these increases are nice, since the markets took down most of our existing accounts even with contributions.
So in the end 2007 was very good to us. We paid off over $6000 on the principle of our mortgage and also managed to increase our investments total from $32,100 to $53, 600. So in total (excluding the house market gains) that is an increase of just over $27,000 in 2007. In 2008 I hope we can do better, but with our new baby coming I’m not sure if that is going to be possible or not. I’ll keep you all posted on how we manage.
Despite our wishes to all get along in universal peace, there are always going to be arguments about things. For example, people start comparing things and then get upset by the results. A classic case came to mind this morning when I noticed a post over a Million Dollar Journey comparing PF bloggers net worths.
I give Frugal Trader credit that he also put up the ages of the people on the list to help assist people when comparing and a disclaimer that the calculations of each number might be a bit different. The danger of a list like this is when you start comparing yourself to someone else is not realizing what the detailed differences are.
Net worth is a bit of a slippery comparison method as each net worth will be completely different when you strip back the layers. For example, my own I know is heavily weighted by my house’s market value. So if I compare it to someone else who have more in stock and cash does it mean I’m worse off then they are? No, the fact is it doesn’t mean anything at all.
Everyone in life has a unique path financial speaking. Some have college paid by their parents, while others get student debts or skip going entirely. Some buy a house young and others wait or prefer to rent. Some have a couple of kids before they turn thirty and other don’t have they first until after thirty five. Each of these factors can have a huge impact on your net worth value and what makes up your net worth.
So when MoneySense magazine came out with their “wealth test” a few months ago I had a quick look at the results to see where my net worth compared. Generally speaking I didn’t really compare with the average person at all, but it doesn’t mean that the average person was wrong. We each choose to live our lives how we see fit and your net worth comes out of it. Also people have difference opportunities and skills which will define their net worth. For example, I don’t own many individual stocks, since I’ve never been that good at picking them until I did some reading on the subject, so now I’m trying.
In the end, your net worth is a number for you. It’s a sign post telling you your doing the right thing if it is going up on a year to year basis. If you do compare it to some one else, keep in mind the results could be meaningless if you looked into the details. Beware the dangers our comparing yourself to others, you might just end up releasing feelings of fear or envy.