Many people dream about reaching the million-dollar net worth milestone, as if that lofty benchmark somehow guarantees a strife-free financial life. Preposterous! Net worth — the value of your total assets minus your total liabilities — is overrated because it’s very misleading, as evidenced by many “paper millionaires” who struggle to make ends meet. Yes, net worth is a terrific indicator for estate planning, or identifying how much insurance you need to cover your assets, but it only provides a partial snapshot of your present financial situation.
The bottom line: Your ultimate goal should be financial freedom — and that requires minimal net worth.
Photo Credit: kennethgray
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Your last line says it all, Len. I have a brother who has a very successful career. I am sure his net worth is several multiples higher than mine. But he and his wife have so many toys and live so large that he is a slave to his job. I live a comfy but modest life style and wouldn’t skip a beat (at least not for a long time) if I lost my job or my income took a hit.
And that’s precisely why it’s better to strive for financial freedom, as opposed to a million-dollar net worth, Tanya!
To me, a high net worth means I will have financial freedom when I retire (because most of my net worth right now is in retirement accounts). The important thing to me is that my net worth goes up every month, because that means I’m living within my means.
Although, if you include the value of your home as part of your net worth calculation (I do not), then I can see cases where a rising net worth can be misleading. For example, during the last housing run-up, plenty of folks were running up credit card bills, spending more than they earned and getting themselves in financial jeopardy — but their net worth was increasing because the value of their homes was going through the roof. They felt wealthy, and believed they were in good financial shape — but they really weren’t!
It’s all about the cash flow Len.
I must admit that I’m one of those people gunning for the million dollar mark. It’s been my goal for 20 years and I’m slowly reeling it in. I figure with my frugal liestyle and lack of payments, I shouldn’t have too much trouble living on it. Now, if the stock market would only cooperate.
Oh, I’m gunning for it too, Bret!
I’ll probably have a little celebration dinner the day I finally cross it — just to mark the occasion. In the end though, I realize it’s not necessary as long as I continue to focus on maximizing my income, spending less than I earn and keeping my debt to minimum.
And if you play it right, you can celebrate twice…just make sure you cross it by only a couple bucks, then spend enough on the dinner to take you back *under* a million, then celebrate again when you go back over!
LOL! Clever, AJ. Very very clever.
I think a lot depends on why you are tracking your net worth! If it is just one factor in determining progress toward a goal, It is perfectly okay.
Just to be clear, I’m not a net worth snob. I do track it because I’d love to retire by the time I am 55 — and it gives me info that helps me figure out how close I am to that goal. I only calculate it once per year though (every January).
Great point. Bret brings up the idea of cash flow and that is so true. Net worth is important, but managing cash flow is even more so.
Agreed!
net worth is not misleading. these “paper millionaires” who live beyond their means should not take away from how important net worth is for wealth management. there are always people that can’t spend money without digging themselves into a hole.
agree with the paRT about not including your home in net worth though. only investment property should count towards your worth in my book.
I guess we’ll have to agree to disagree then.
I just started tracking mine monthly a few months back. After the first month or two, I found it to be a bit useless. Granted, it’s a nice ego boost or whatever to see it run up $20K on a good market month, and then depressing following a month like this. It’s tough to envision ever solely “living off my nest egg”; will be interesting to see what’s left of social security, pension, side-income when I reach that age.
When I was younger I used to track it monthly. After a very short while I realized it really wasn’t worth the effort — that’s when I went to once per year.
How funny — I JUST calculated mine for the first time last week!
I’ve always avoided calculating my net worth because, like you, I’ve always believed that what really counts is your monthly passive income. Net worth, I always thought, is irrelevant.
I decided to calculate my net worth last week after seeing so many PF bloggers with Net Worth graphs on their homepages. It made me curious. I couldn’t resist.
And now that I’ve calculated it, I want a million. I want that psychological “win,” even though I know it’s unrelated to my monthly passive income and my financial freedom.
Darn it, I’ve created yet another irrelevant goal for myself, in order to make myself feel better. **Sigh** That’s human nature, I guess.
I’m with you, Paula. Passive income is much more interesting to track — and it provides real rewards too that are extremely satisfying!
By the way, what does that photo have to do with net worth?
Good question. It’s a money bank (from Nepal, I believe — curiously enough). It was either that or another picture of my dog!
“requires minimal net worth”, but it does require a certain net worth, as well as a cash flow. Having a goal of a certain net worth, knowing it will give you a certain cash flow is not a bad thing.
An adequate and reliable cash flow is key; as long as you have enough to cover your living expenses, I can think of potential (if not a bit odd) scenarios where you can arguably be financially free with negative net worth.
I, too, was going to ask about the photo. Looks a bit like a blackface doll or whatever they’re called, in which case doesn’t seem appropriate.
Net Worth is a simple calculation on any financial spreadsheet and I feel that it is vital to track. It is important to see it going up every month because it is a barometer of your spending habits and the growth of your assets (retirement accounts savings accounts, etc).
I don’t include physical asset values in this number (home value, car value, collections, etc.) as they are only worth what you can sell them for. I do include any debts relating to those assets (remaining car payments, mortgage value, or student loans for example).
I am not entirely sure why you wouldn’t be more of an advocate for the use of this tool.
I agree that the net worth is only a partial snapshot, but so is cash flow. It’s good to track both. Companies must report both their balance sheet and their cash flow in their annual report because only with both do you obtain the full picture.
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[...] Why Tracking Your Net Worth Is So Overrated The real issue is why you are tracking your net worth. What’s the purpose of it? What does it gain you? For me, it’s simply a reminder that I’m spending less than I earn every interval. (@ len penzo) [...]