
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 $150,000Ā 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 gainsĀ 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?
Ah.. leverage.
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 unreliablyĀ fakeĀ 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:
Via
This expansion, both personal and business, led to mounting debt.
[…]
By 1989, poor business decisions left Trump unable to meet loan payments.
[Source]
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.
HeĀ over leveragedĀ himself to the point whereĀ 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.
Not so much as a way to determine your self worth or to laud over others.
13 Comments
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Taylor Lee @ Yuppie Millennial
Ditto on molyb’s comment, I think you might have the assets and debt for person B flipped.
In general I kind of disagree but I also don’t think of debt as a moral issue. Trump is even a good example of it. Even when he was net worth 0, he had significantly greater access to capital, material wealth and comfort, and power. Because of his access to credit, he was in a better material position than a homeless man even if their net worth may have been synced. Realistically, even if all his businesses failed and he’d been millions in the red, that risk is not really that much on him due to bankruptcy laws. I’d posit the average person with 100k assets and 100k debt is probably in a much better position than someone with nothing to their name.
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molyb
I think I must be missing something big here, but how do the 2 people have the same net worth? If net worth is assets-liabilities/debt, then person 1 has a net worth of 50k-0=50k. Person 2 though has a net worth of 100k-150k= -50k, so they aren’t the same- one is positive and one is negative…
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SarahN
Take this example:
– -$300k (debt in a mortgage) for a property (bought for $465k)
-$265k in cash (including retirements funds, shares etc)On the balance, I could have $45k debt and no ‘cash’. But also, that property bought at $465k is worth $600 k on recent market and bank estimates (the former is usually aiming to BS you to the ‘best best’ possible, the latter usually incredibly conservative).
In my net worth calculation though? $485k (a modest $5k pa increase).
Then I’m at a new position of $425k give or take, overall position with a CONSERVATIVE price on my property.
Yep, I have debt. Yep, I ‘waste’ money in interest. But when I sell, I will have the ‘cash’ and the difference between what I sell for and what remaining mortgage.
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Revanche @ A Gai Shan Life
Off Topic: Can I just morally object to the fact that I had to see that turfnugget’s face on your blog because it doesn’t belong here? Because ew.
(If you can’t tell, I’ve had it up to here and beyond with our current election cycle that will never end and particularly with that embarrassment of a candidate.)
ArianaAuburn
Net worth matters when it is mostly CASH. Or at least some liquid assets that can be converted into cash. Having a large net worth matters when you or a loved one needs medical access or treatment and your godforsaken health insurance denies it. It doesn’t measure self-worth yet it is used by people to judge others. Because let’s face it: we are all trying to survive and money helps in survival.
As for real estate….property assessments change and prices go up or down. A nice lot or house could be sitting on top of a environmentally toxic area, a geological fault line, a flood zone or a place near a sink hole. Yeah no one realizes those things when purchasing real estate.