What is value of Net Worth?

In personal finance, Net Worth is referred to as an individual’s financial state at a given point in time. In a very simple form, it is the value of assets minus the value of liabilities.

When we individuals include all the assets in our financial planning, we tend to include value of our house, value of car, and other capital goods items. Here I am talking about assets that we use in our daily lives (not the ones we use as investments). The way I look at it is, instead of tying my financial resources in non-performing assets, what if I used it to generate more cash flow. If I have one million dollar, and I buy a house, then my capital is lost. It is not going to generate more money. Well yes, anticipating value appreciation and expecting to cash in 20+ years down the line is the different issue. Even after 20+ years, one will need a place to live! To buy a house 20 years down the line one will perhaps need more money (time value of money and inflation!), and if one does not down size, perhaps all the capital appreciation will go into a new place.

In addition, net worth is a moving target in a sense that external sources (beyond my control) drive it. I cannot control how to manage it. I cannot control its progress. So how will it help me in my goals?

Among others, I believe increasing cash flow is very significant element of wealth creation. Using available resources to increase one’s cash flow will increase your wealth. If I have a million dollar, I would use it to open MacDonald or Dunkin Donut which will generate continued cash for me, instead just of tying it up in non-performing asset which I use in my daily life.

Suffice to say, I do not use Net Worth as a benchmark, or as measure of progress. In my financial planning, the use of Net Worth is worthless. It does not provide me an effective way of measuring my goals or progress. Therefore, I address these assets as current expenses (house of living, car for diving, etc).

What are your thoughts about Net Worth? How does it help you measure your financials goals?

8 Responses to “What is value of Net Worth?”

  1. mei says:

    Can’t state enough how important the sacrifices that go into wealth creation are.

    Curious if anyone has caught this book yet? “The Richest Man in Town” by W Randall Jones. I’ve read half of it so far and let me tell you it is well worth it. Would like to hear what everyone else thought of it?

    http://www.richestmanintown.com

  2. bingyboz says:

    the concept of networth is another crap created by wall street. it cannot be validated. it is very subjective. they created it to bump up their own bounty. they bump up the false sense of value, but they take bonuses in cash. they make smart moves, only for themselves.

  3. Slinky says:

    Personally, I don’t calculate a true net worth. I only calculate my cash, investments, and debts. Having a positive net worth is good so that you’re not over leveraged with debt, but after that it’s just a feel good metric. Like you, I’d prefer to track cash flow or income replacement.

    Slinky’s last blog post..Victory is mine!

  4. DGI,

    I believe current financial collapse is combination of many things, and not only the individual consumers. If individuals chose to take those mortgages, then the smart (qualified, knowledgeable, six figure salaried wall streeters) financial investing community were more than happy to lend to these crappy consumers. If I fail the exam and still get passing grade, then my teacher and the university who appointed such a teacher is also at fault. Not me alone.

    I am certainly for owing a house. There are no two thoughts about it. My viewpoint is about using it for net worth which provides a false sense of richness. Treating the mortgage payments as expense out facilitates the real benefit. Because it is not available now. This false sense of richness results in re-tapping of housing equity. Another way to look at this is, it gives a false impression of net worth which is tied as housing equity, which in turn is worthless for wealth building. As you folks mentioned it is only a very good inflation edge. Above all it is a place to live, not to be cashed or measured in net worth.

    Thanks for leaving your comment. I like the discussion.

    Best Wishes,

  5. Money Penny says:

    I agree with dividend growth investor. Owing a house is always a better deal. But I also believe net worth is crappy because it gives a false sense of wealth, which is not there. It is just a financial jugglery spread by financial cheats at wall street. And you need two hands to clap, same way, if people screwed up then folks in financial services facilitate the screw up.

  6. Even though income generation is important saving money by investing in a house is important as well.
    It’s true that 1 mln opens a mcdonals franchise, which could earn you say $50K. But what if you decide to rent out a house worth $1mln ( since you need a place to liv anyways) whose rent is also $50K/year. Would you be better off owning a home and not renting, or owning a franchise and renting?

    I would personally own a home and hedge myself against rent increases and inflation since I need a place to live no matter what. People who think they could use the money they need for living expenses are responsible for the current financial collapse.

Leave Your Comments




Personal Blogs - BlogCatalog Blog Directory ~