Calculating your net worth

[laurence]

Where does my daughter fit into my net worth? It's certainly included!

I'm not looking to become a CPA, my net worth calculations can definitely be done on the back of an envelope.

[Jarhead*]

My assets are a reasonably good golf swing.

My liabilities are my wife's refusal to get a job to take care of escalating green fees.

[BigMoneyJim]

Just to throw some more wrenches in the works that have been mentioned in previous net worth threads:

One must decide if/how to:
- Value future SS benefits
- Value future vested defined benefit pension benefits
- Account for tax penalty if pretax assets are tapped early
- Account for variable tax rate if pretax assets are withdrawn in bulk or over time


There's plenty more. I think the question to ask is why you're calculating net worth. That answer should probably guide your answer to the rest of the questions. e.g. if you want to compare net worth with peers then try to use the same method they use..

[Nords]

Quote:

Originally Posted by BigMoneyJim That answer should probably guide your answer to the rest of the questions. e.g. if you want to compare net worth with peers then try to use the same method they use.

What's the point of comparing net worths with others? Testosterone poisoning?

Even if you're tracking your own net worth enroute ER, what are you going to do if your progress is too slow? (No one complains about a meteoric rise in net worth.) Did you really remain unaware of a "problem" until your net worth statement started flashing warning lights? How do you distinguish a "net worth decline" from normal asset volatility? Shouldn't ER-trashing problems be more easily detected in your credit-card statement or monthly spending?

And even if your net worth isn't rising as fast as you think it should be, what do you do about it? Aren't you already doing as much to reduce spending & raise savings as you feel is reasonable? Would you get a second job? Sell your house before it declines further in value? Get rid of a car? Lay off a kid or two?

I remember the board uproar over TMND's "formula" for accumulated wealth vs income. People felt intimidated, nay insulted, over a statistical relationship purporting to tell them how much they should be worth for a certain income level. So who cares how you build your balance sheet as long as you understand your cash flow statement?

This thread reminds me of the ongoing "debate" over whether the SWR should be 3.99% or 3.98%...

[justin]

When I posted my original questions, I didn't realize that there are many reasons for calculating one's net worth. For me, I am still young and in the very early stages of my accumulation period. My net worth is not close to being sufficient to ER. I look at my net worth as a measuring stick to see how much I have grown financially each quarter and each year. My goal is to maximize net worth. I seek to do this by optimizing the growth of my net worth through efficient management of debt and making good investment decisions. That is an abstract statement, but it reflects my view of how I intend to grow net worth.

Paying down debts (mortgage, student loans, etc.) increases the net worth on the balance sheet by reducing liabilities. Reducing debt also reduces the carrying costs for that debt, which leaves more money each month for investing.

Having said that, I can see why it is appropriate for some to list only the income generating assets on their balance sheets. This is the number you are plugging in to your FIRE calculator or ORP or whatever you use. I may take this approach as I get nearer to early retirement age as well.

I really didn't mean to make such a big deal out of the net worth calculation. For me it is just a back of the envelope calculation (done in a spreadsheet of course) that is quick and dirty. When using the figure, I have to take it for what it is.

I figured some here may have great insight into the issue, since there are a lot of great minds here. I think this discussion has opened my mind to a number of things to consider in my net worth calculations.

[cute fuzzy bunny]

About the only plausible use for net worth is to track how you're progressing. Therefore your net worth calc is your net worth calc. You can be consistent with it and it'll tell you as you go how much you think you have in assets and liabilities that you agree with. Or you can keep changing the metrics and get little from it.

Or you can argue what does and doesnt constitute an asset or liability with others, ad nauseum.

Certainly cant be used as a comparator unless everyone else does the same thing the same way. Good luck with that.

I think having looked at Money and Quicken, they both do the same thing...add up your house, your cars, your personal effects and the value you would get selling those is your asset lump. Take away any loans, credit card debt, etc and those are your liabilities. Subtract liabilities from assets, thats your net worth.

[BigMoneyJim]

Quote:

Originally Posted by Nords What's the point of comparing net worths with others? Testosterone poisoning?

I started with another example (it was just an example), but it was getting too long-winded and specific. Personally I haven't been calculating net worth on a periodic basis, but when those "at age 35 you should be worth ..." articles pop up I'm curious what methodology they use. Sometimes I feel like I'm doing a great job financially, but other times (especially after hanging out here for a while) I feel hopelessly behind in my financial situation.

Quote:

Shouldn't ER-trashing problems be more easily detected in your credit-card statement or monthly spending? And even if your net worth isn't rising as fast as you think it should be, what do you do about it? Aren't you already doing as much to reduce spending & raise savings as you feel is reasonable? Would you get a second job? Sell your house before it declines further in value? Get rid of a car? Lay off a kid or two?

Now that he's said he's interested in tracking net worth for the purposes of ER I think the questions you posed are more applicable than what his net worth is.

I also agree that monthly expenses and debt statements are more important and useful to look at than net worth or asset returns. In my case--after paying off my debt--I'm still hunting for my comfort zone of saving versus spending and where to save (401(k) vs. after-tax). Last time I checked I'm 20 years from retirement with conservative return estimates and today's expenses (in today's dollars). That's too far to make sane plans for ER, so I'm focused on today. And I'm mindful that I may not live 20 more years or may not be healthy in 20 years, so I'm not going to sacrifice everything today for a distant utopian early R. (UER?)

[sgeeeee]

Regarding my personality score:

Quote:

Originally Posted by Nords Asset or liability?

Yes.

[Lazarus]

I don’t think there is a generally accepted way to calculate net worth. I only do it to track how I am doing and I have used the same method for the last 10 years. I think it does help in making purchase decisions. For example cars. Does anyone think buying a $50,000 car will help their net worth? I have no problem with you buying one if you can afford it and understand what it is costing you. I myself cannot afford to. A much cheaper car will satisfy the transportation requirement and will dent your net worth a lot less. My goal is to acquire sufficient wealth to produce a cash flow that will enable me to live comfortably without working. Net worth is the keystone in that calculation. Of course there are many other factors involved in reaching FIRE, I don’t mean to over simplify. I don’t think many people on this board are figuring their net worth in order to see how much better they are than someone else. It’s about freedom. If I have enough, I have enough, no need to work longer to have more.

[haha]

Quote:

Originally Posted by Lazarus For example cars. Does anyone think buying a $50,000 car will help their net worth? I have no problem with you buying one if you can afford it and understand what it is costing you.

What an amazingly tolerant person!!

Ha

[BUM]

Justin,

I like your balance sheet approach to determining net worth. I've been doing the same thing for years. I value my real estate by estimating its conservative selling price.

As far as misc. items goes, I use the "fish bones" approach and account only for significant items, i.e. Account for your classic car but not the gas in the tank, change in the ashtray, the fuzzy dice. Watch the big stuff.

I think the smallest item I track is the cash value of my whole life policy. I also update 1/4'ly.

[cute fuzzy bunny]

Crap. I account for lawnmower oil and gas...:P

[Ginger]

Every December. I go through all our statements, stock valuations, assets, etc. and do a complete Financial Statement. *I have a form that I fill out on our computer. * A simple process. * I think once a year is sufficient to get an overview of where we are financially. *Trying to keep it simple ---

[dm]

Ive been tracking mine since 1998. I track my retirement holdings, taxable portfolio, cars, and house. I havn't been showing any gain on the house but since I use to have a mortgage I used my purchase price and then tracked my mortgage being reduced. I update mine very often. It has helped me over the years to reach goals. How would you know if you could ER if you don't know where your at?

[Newell]

I only use net worth when dealing with estate planning. Other than that, if the asset doesn't produce income, it's of little interest.

[maddythebeagle]

I think the Millionaire Next Door indicates that if your net worth is over 2x(age x income)/10 then you are where you should be as an accumulator of weath. This should include your home equity in this calc. It's more an indicator if you are a saving enough for your level of income. Not if you have wealth enough to retire.

As for FIRE planning, I think home equity should be considered only as not having a mortgage or rent. I suppose you could tap it and get money or move to a smaller house or cheaper area.

I personally wouldnt deduct capital gains off of my stock investments because I dont plan to sell a lot (rather will be taking in dividend income from them). I also wouldnt worry about taking off taxes from your tax deffered investments since there is an assumption that this money will grow tax defferred until it is taken out (my assumption would be that the taxes would be paid for in the compounding over the years). Taking the taxes out right now in my calcs. doesnt make sense. On the pensions, I assume that I will live a certain number of years (like to use avg. lifespan numbers).

[ShokWaveRider]

I agree with that NOT "??" guy! Your net worth is exactly that, Yours! Calculate it how you like.

Personally I count only cash or cash equivelents. Oh and yes the house counts. I personally do not count the car(s) or household items, but thats me. If I was going to count a car, boat, plane etc. I would count them at 50% of what YOU think they are worth.

SWR

[MRGALT2U]

Quote:

Originally Posted by ShokWaveRider I agree with that NOT "??" guy! Your net worth is exactly that, Yours! Calculate it how you like. Personally I count only cash or cash equivelents. Oh and yes the house counts. I personally do not count the car(s) or household items, but thats me. If I was going to count a car, boat, plane etc. I would count them at 50% of what YOU think they are worth. SWR

I count paper clips, envelopes and pancake batter. Not the dogs though.
They should be deducted as current liabilities. My rule is:
Anything you can sell should go in at the estimated (net) selling price.

JG

[cute fuzzy bunny]

See how this differs? My dogs count as home security. I dont have to worry about locking my doors. Anchovy farts in alaska or a neighbor drops the newspaper after they pick it up and these suckers are at the door sounding like they're gonna kill someone. Right after they lick em and see if they have any food or are willing to rub their tummies that is.

[Sillysal]

This may only be useful to you if you are applying for a loan, which I doubt many ERs are doing....

At my bank, we have people fill out balance sheets with supporting schedules. Assets are listed at FMV in order of liquidity. Liabilities are listed at current balance, with consumer-type loans (CC, Auto, etc) first, then real estate loans, then business-type loans. Schedules provide information such as cost of assets and date of acquisition, so we can determine if their FMV is reasonable. Liabilities schedules show committed amounts on lines of credit, and maturity dates and payments. If closely held businesses are listed, they would generally be shown by stating the owners share of equity, with a supporting BS of the company.