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?