Earlier today I described net worth, and asked if it were the most important number in personal finance. Many people believe that it is. For them, it acts as a motivator, a sort of “life scorecard”. For others — and I'm one of them — net worth is just another number.
As I do my finances, Quicken computes my net worth, but it seems largely irrelevant to me. I don't even know what the number is at the moment. (I'd have to open Quicken to check.) There are two main reasons I don't track my net worth more closely:
- I've never figured out how to calculate my net worth in a meaningful way.
- There are other numbers that are more useful to me.
I recognize that net worth is an important part of my personal finance toolbox, but to me, it's just one tool of many.
Learning the rules
For net worth to be meaningful from one year to the next, it must be calculated the same way each time. But what's the best way to calculate it? Here are just a handful of the dilemmas I face personally when trying to generate the number:
- Kris and I keep separate finances. When calculating net worth, do I include just my assets, or do I include hers too? How do we account for joint assets like the house?
- Should I even include the house? If so, how do I value it? At the price we paid in 2004? At an estimated market value through something like Zillow? At its assessed value? Or should I track my net worth without real estate?
- What about my businesses? I own ten percent of the box factory. I own 100% of Get Rich Slowly. How do I determine what these are worth? How do those numbers figure into my net worth?
- My financial records are incomplete until about 2005. How do I account for the gaps? What good is tracking my current net worth if I don't know my past net worth? Will knowing my net worth change the way I do things?
I don't know the answer to these questions. As a result, I don't track my net worth except for the Quicken auto-computation. I do look at that number every few months, but more out of curiosity than for any real purpose.
Don't get me wrong — I'm not dissing net worth. For many people — perhaps for most people — it's a great way to “keep score”, to track progress while accumulating wealth. But I feel like it doesn't do a good job for me and for my situation.
If I find net worth inadequate, then what numbers are important to me?
- When I was in debt, the only number that mattered was the amount I owed. That kept me focused on the task at hand. (And even when I was in debt, my net worth was positive, so that wouldn't have been a good motivator.)
- Now that I'm out of debt, the number that matters most is my savings account balance. (It's getting close to my $10,000 goal!)
- Once I finally have enough tucked away for emergencies, I'll focus on my retirement savings. You can be sure that'll be a big topic around here in 2009. (We can all try to determine our Magic Numbers!)
- Our mortgage balance is also important to me. Kris and I have our own mortgage acceleration plan in place, and we like watching the balance drop. (It'll fall below $210,000 this month.)
Compared to these four numbers — numbers that measure my immediate needs and goals — net worth seems secondary. I recognize that it's an important reflection of my overall financial health, but I believe that if I focus on these smaller things, my net worth will take care of itself.
As always, do what works for you. If net worth is a valuable tool for you, if it keeps you motivated, if it provides information you can use, then use it.
However, if net worth seems like just another number, don't sweat it. It's still a good idea to check your net worth every year or so, but if other numbers are more important to you, then let those motivate you to success.