Why your net worth may not matter at all
Net worth, net worth!
All we talk about in the PF world is how much money we have to our name, am I right?!?
Well I am here to say that perhaps net worth is not that important as we think it is.
To put it another way, someone who has $50,000 as their net worth and no debt at all is better off than another who has $150,000 saved but has $100,000 in debt.
They both have the SAME $50,000 net worth, but I’d rather be the former person than the latter.
That person with that $100,000 in debt:
- obviously has interest payments (which chips away at your money)
- is in a more precarious position if they were to let’s say lose their job
- has a lot more liabilities than assets, and is banking on their future to help ease the ratio
- ..and it’s all paper gains anyway until you realize the income as cash in your bank account
Update: Thanks for the catch, readers. My only excuse? #toddlerbrain
BUT WHAT ABOUT EARNING MORE MONEY WITH LEVERAGING DEBT?
Of course you can say that if we borrow $150,000 at 2% and put it on the stock market to earn 7%, we’re coming out 5% ahead of the game… but these are all (in my mind) debatable, and therefore unreliably fake numbers, because we can only estimate how things will go, but none of us has a crystal ball to see into the future.
Mr. Donald Trump comes to mind for this particular situation:
This expansion, both personal and business, led to mounting debt.
By 1989, poor business decisions left Trump unable to meet loan payments.
Basically, he did what everyone says is the smart thing to do (borrow to get into debt to obtain more assets), and almost paid in blood for it.
He over leveraged himself to the point where I remember reading an article with Ivanka Trump saying that when she was young, her father once pointed to a hobo on the street and said: This man has more money than I do right now.
Things worked out in the end for Trump, but it could have just as easily gone the other way.
He has used bankruptcy as a way to gain more money, which is even more immoral.
What’s real in my mind, is what you have banked, and what you owe (in relation to each other).
This is also partly why I am a big fan of NOT being in debt, unless it’s truly secured at a 0% or 1% interest rate (something that would mean I could stick it in a high interest savings account and make money, like with your student loans when that you can defer while you’re in school).
That said.. your net worth is important as a benchmark for how you are doing for the future to reach your goals.