What is net worth and why does it matter?

[Anonymous]

For those curious about their NW number, I started using Personal Capital earlier this year after seeing it recommended here, and it's been incredibly enlightening for both our net worth information and our cash flow information. Kinda depressing, as we're fairly house-poor after buying our house in 2017, but so helpful to see it laid out the way they do it.

[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 think cash flow is more important. Generally, you can't spend "net worth."

Both are important. If you make $500k and have no savings you have good cash flow and zero net worth. If you have $5M and no income the opposite is true you need both. A good offense (income) and a good defense (savings.)

[Anonymous]

The value of net worth is the ability to generate future cash flow as needed/desired. Investment assets can be structured to produce income streams, or can be sold to give lump-sum cash. If you own your house outright, it can be sold or you can take a loan against it to generate cash. If you have no net worth and you lose your current source of cash flow, you have no way to replace it until you can find a new one.

[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.

But with a $500k annual income one could quickly build up their net worth if the so desired. This is hardly up shit creek.

[Anonymous]

Anonymous wrote:

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.

But with a $500k annual income one could quickly build up their net worth if the so desired. This is hardly up shit creek.

It's not ideal. This poster is 55 (not young!) And sitting on 900k in mortgage debt with no end in sight, plus a major spending problem with 50k in credit card debt. This individual will be on the grinding hamster wheel long after many of their peers are winding down enjoying life. Hopefully this poster is self employed because age discrimination is just around the corner.

[Anonymous]

Why does it matter? LOL.

Oh it's only the figure that totals up your LIFE SAVINGS.

[Anonymous]

Any suggestions for how to quickly estimate value of pensions and investment property?

[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 think cash flow is more important. Generally, you can't spend "net worth."

Both are important. If you make $500k and have no savings you have good cash flow and zero net worth. If you have $5M and no income the opposite is true you need both. A good offense (income) and a good defense (savings.)

Except if you have $5M saved, you could easily generate income from that.

[Anonymous]

Anonymous wrote:Any suggestions for how to quickly estimate value of pensions and investment property?

If you don't have control of the pension funds and/or won't take them as a lump sum, they're not part of your net worth.

Investment property is appraised.

[Anonymous]

Anonymous wrote:

Anonymous wrote:Any suggestions for how to quickly estimate value of pensions and investment property?

If you don't have control of the pension funds and/or won't take them as a lump sum, they're not part of your net worth.

Investment property is appraised.

This may be technically true, but pensions can have an enormous impact on your financial needs and so it can be helpful to figure them in your planning (I wish I had one!). One estimating approach I've seen is to multiply the expected annual income by 25 to mimic the opposite of the 4% withdrawal rate from a lump sum. So if you expected an annual 40k pension that would be the equivalent in terms of producing retirement income as having 1 million in assets (though not exactly because when you die you aren't left with the principal). Another approach is to see what it would convert to as a lump sum distribution and use that even if you're not intending to take a lump sum. Or you can just go the most straightforward route and NOT add the pension to your net worth but reduce the income you need to draw from your net worth.

[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.

+1,000,000

[Anonymous]

Why Net Worth Matters. It’s very simple:

Close your eyes, clear your thoughts. Now, imagine life with NO More Income. NO more paycheck. Not for just a few weeks, or a few months or some time in the future when you will “go back to work”. No Income. Ever. Again...Ever

It’s a sobering thought, no?

[Anonymous]

Sobering thought PP and I’ll add I’m in my 50’s. My friends in their 40’s still view NW as a measuring stick. At my age, I view it as a future quality of life issue and not burdening my children.

The realization of “you’ve got what you’ve got and that’s it” starts to hit for most people near 50. Even if you were a saver all along, as I was, it’s still just this nebulous “I should be saving because I know I should be” mentality until you are facing the impact of your future head-on. At that point, you want to be the person who says, “whew, I’m glad I saved”. Trust me. Because even then it’s still pretty daunting.