What is net worth and why does it matter?

[Anonymous]

Anonymous wrote:

Anonymous wrote:When you talk about your finances, do you think purely in net worth or something else? Why is net worth a measuring stick of wealth?

I have no idea what mine is. I have a vague idea. We invest via direct deposit each month, I've faithfully been maxing out my 401k since age 22 , have backdoor roths, and have 2 investment properties. I know I will have enough to retire, send my kids to college, and leave some money behind when I die.

As far as knowing my net worth? No. I go over these things on an annual basis when we meet with our CPA to do taxes.

You meet every year with your CPA, but have no idea of your net worth? Sorry, not trying to badger, but that sounds weird. We don't have a CPA, but just looking at my mint account gives me a good sense of our net worth to the minute.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:When you talk about your finances, do you think purely in net worth or something else? Why is net worth a measuring stick of wealth?

I have no idea what mine is. I have a vague idea. We invest via direct deposit each month, I've faithfully been maxing out my 401k since age 22 , have backdoor roths, and have 2 investment properties. I know I will have enough to retire, send my kids to college, and leave some money behind when I die.

As far as knowing my net worth? No. I go over these things on an annual basis when we meet with our CPA to do taxes.

You meet every year with your CPA, but have no idea of your net worth? Sorry, not trying to badger, but that sounds weird. We don't have a CPA, but just looking at my mint account gives me a good sense of our net worth to the minute.

Agreed. It's a good idea to have a handle on your finances. If you can do a backdoor roth and purchase property, you can look up your NW.

[Anonymous]

What is net worth? Assets minus liabilities.

Why does it matter? It's helpful to know whether you have a positive balance sheet. Having a large net worth gives you certain securities. Having low net worth is precarious.

Does it tell you everything about a person's financial picture? Of course not. Is it an important part of that financial picture? Absolutely yes.

[Anonymous]

If you are 50 and your income is $500,000 and your net worth is $500,000 you're screwed. If your net worth is $5,000,000 you're doing fine. That's why net worth matters.

[Anonymous]

Anonymous wrote:If you are 50 and your income is $500,000 and your net worth is $500,000 you're screwed. If your net worth is $5,000,000 you're doing more than fine. That's why net worth matters.

Fixed that for you.

[Anonymous]

Anonymous wrote:

Anonymous wrote:Net worth is everything.

+1 We are high income, but only recently and we just got out of debt from student loans. Our net worth is not what a person might expect if they just saw our income. Income can change in the blink of an eye, but money you've saved/invested is yours even if your circumstances change.

Similarly, a person who makes $100k and saves $15k is in a better position than someone who makes $500k and spends $499k.

Long story short: it's not what you make, it's what you keep.

This!

[Anonymous]

Here is an example of how to calculate net worth and why it is everything. Our balance sheet is:

Assets:

Home value: $1.7 million.

Retirement savings: $3.1 million

Brokerage and checking accounts: $1.51 million

Total assets: $6.21 million

Liabilities:

Home mortgage: $745k

Net worth: $5.565 million

Annual income: Zero

Retired in early 50s

[Anonymous]

Anonymous wrote:Here is an example of how to calculate net worth and why it is everything. Our balance sheet is:

Assets:

Home value: $1.7 million.

Retirement savings: $3.1 million

Brokerage and checking accounts: $1.51 million

Total assets: $6.21 million

Liabilities:

Home mortgage: $745k

Net worth: $5.565 million

Annual income: Zero

Retired in early 50s

And for the counterexample:

Assets:
Home value: $1M
Retirement Savings: $400k
Brokerage and checking accounts: $100k
Total Assets: $1.5M

Liabilities:
Mortgage: $700k
HELOC: $200k
Credit Card debt: $50k

Net Worth: $750k
Age: 55
Annual Income: $500k
Status: up shit creek.

[Anonymous]

Anonymous wrote:

Anonymous wrote:Here is an example of how to calculate net worth and why it is everything. Our balance sheet is:

Assets:

Home value: $1.7 million.

Retirement savings: $3.1 million

Brokerage and checking accounts: $1.51 million

Total assets: $6.21 million

Liabilities:

Home mortgage: $745k

Net worth: $5.565 million

Annual income: Zero

Retired in early 50s

And for the counterexample:

Assets:
Home value: $1M
Retirement Savings: $400k
Brokerage and checking accounts: $100k
Total Assets: $1.5M

Liabilities:
Mortgage: $700k
HELOC: $200k
Credit Card debt: $50k

Net Worth: $750k
Age: 55
Annual Income: $500k
Status: up shit creek.

Sorry bad math -- NW should be $550k.

[Anonymous]

Net worth is only valuable to me so my kids don't have to care for me when I am old. I help me figure out when I can stop working for money and still support myself until I die.

I think there is something wrong with people that collect wealthy, like an ego issue or a spiritual issue.

When I discuss finances I talk about being able to pay my bills and my kids college.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:When you talk about your finances, do you think purely in net worth or something else? Why is net worth a measuring stick of wealth?

I have no idea what mine is. I have a vague idea. We invest via direct deposit each month, I've faithfully been maxing out my 401k since age 22 , have backdoor roths, and have 2 investment properties. I know I will have enough to retire, send my kids to college, and leave some money behind when I die.

As far as knowing my net worth? No. I go over these things on an annual basis when we meet with our CPA to do taxes.

You meet every year with your CPA, but have no idea of your net worth? Sorry, not trying to badger, but that sounds weird. We don't have a CPA, but just looking at my mint account gives me a good sense of our net worth to the minute.

Agreed. It's a good idea to have a handle on your finances. If you can do a backdoor roth and purchase property, you can look up your NW.

What is the point? My NW is constantly changing. I already have a handle on my finances, so much so that I only see in my bank account 50% of my NET income, the rest is invested or put in an account for future real estate investments as they present themselves. Market fluctuations between equities and real estate, retirement fluctuations, tax loss harvesting...I'm not going to change anything knowing my day to day NW. I of course have a round idea of what it is, based on the numbers last March and knowing how the market is doing in general, but I'm 40, not anywhere near retirement, and don't see need to cash in any of my chips anytime soon.

I can assure you, after investing in both 401k, roth and taxable accounts for the last 18 years faithfully, plus real estate, my NW is more solid than most. Certainly not a a place that i need to monitor it on a daily basis.

I don't use mint, but I have moved a lot of money into Wealth Front in the last 18 months because of their automatic tax loss harvesting feature. That account has the capability to look at my entire financial picture, but I'm not so comfortable having all of my finances consolidated and viewed by one platform.

[Anonymous]

Interesting responses! Growing up, I was poor & I doubt my parents thought about "net worth". It's a new concept to me as an adult making more than my parents did and having the ability to invest it.

[Anonymous]

Anonymous wrote:Net worth is only valuable to me so my kids don't have to care for me when I am old. I help me figure out when I can stop working for money and still support myself until I die.

I think there is something wrong with people that collect wealthy, like an ego issue or a spiritual issue.

When I discuss finances I talk about being able to pay my bills and my kids college.

Eh, says everyone that never made a ton of money.

[Anonymous]

I think it's about working, and then having something to show for it at the end of your working life.

Thanks to Mint, it's easy to see my net worth on a daily basis.

I think it gives me comfort to know that our household has saved/invested, and now (in our late 40's) we have a nice cushion (something my parents did not have). It motivates you to save/invest further. We are excited to be able to leave a cushion for our kids when we are gone in the form of college tuition for our future grandchildren and we hope a down payment on a house.

Net worth is probably not meaningful to you until you get around 40 years old (once you've had a chance to accumulate and enjoy the benefits of compounding). Before that, it may seem like you don't have much of a net worth, even if you have high salaries.

As a PP said, it doesn't really matter what your salary or HHI is (as that can change in an instant). It's all about what you keep/invest/grow.

[Anonymous]

Agree with 15:21. When you are young-ish, it doesn't matter (or it matters to the extent you minimize how negative your NW is ... i.e. minimize your debts). But, when you get to the point that you have kids and can see retirement in the distant horizon, you need to know your net worth and work toward growing it.

The goal is to have 12 times your final salary saved by the time you retire. Not everyone can make it there. Some people don't need to get to 12x if they have really high salaries now. But, if you have a pretty normal income (between $50K-200K), you should be working toward saving and investing so that it grows to 12 times your final income.

knowing your NW allows you to measure where you are. (although you should not be counting your home in your calculations --- so technically, NW minus home value).