Should the money earmarked for certain expenses be part of net worth?

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luckybamboo
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Should the money earmarked for certain expenses be part of net worth?

Post by luckybamboo » Sat Mar 04, 2017 5:19 pm

Do you add money saved for future expenses(to be made in 2-4 years) like purchasing a car, college savings, remodeling the home etc. be counted in the calculation of net worth?
This is my thinking -
For eg. We have saved about $60,000 for our daughter's college. She will be attending college in Fall 2018. If we add it to the today's networth then the networth will suddenly dip in next 2-4 years as we write checks to the college.
So, do you guys add it to your net worth calculation or just leave it out of it?
Please explain why?

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Pajamas
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Re: Should the money earmarked for certain expenses be part of net worth?

Post by Pajamas » Sat Mar 04, 2017 5:22 pm

Yes, you should include it, at least in theory.

assets - liabilities = net worth

Expenses don't enter into that except as they affect assets and liabilities.

Different people calculate net worth differently for various purposes. For instance, I don't include the value of my apartment in my calculations, but I also don't consider the taxes that will eventually have to be paid on my retirement accounts.

Because this money is earmarked for known future expenses, you could make a case for leaving it out. If you leave it in, you could consider the future expense a liability, which would negate the asset.

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Re: Should the money earmarked for certain expenses be part of net worth?

Post by retiredjg » Sat Mar 04, 2017 5:31 pm

I don't see how "net worth" is a very useful number to know. But if you have a use for it, decide whether to add in the college expenses based on the use you have for knowing your net worth.

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Re: Should the money earmarked for certain expenses be part of net worth?

Post by asset_chaos » Sat Mar 04, 2017 9:59 pm

What's the problem with networth decreasing? You accumulate assets, they're part of your networth. You spend some of those assets, your networth decreases.
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Re: Should the money earmarked for certain expenses be part of net worth?

Post by mhalley » Sat Mar 04, 2017 11:12 pm

Including in net worth is fine, but probably would not include it in asset allocation or emergency fund.

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Re: Should the money earmarked for certain expenses be part of net worth?

Post by traveltoomuch » Sun Mar 05, 2017 12:41 am

retiredjg wrote:I don't see how "net worth" is a very useful number to know. But if you have a use for it, decide whether to add in the college expenses based on the use you have for knowing your net worth.

For me, I'll look at my 'net worth' number and immediately multiply by 4%, thinking "ah, that's how much income this would give me". If it's not an income-producing asset (e.g. the home I'm living it) or is earmarked for something nearer term, then it probably shouldn't be in my 'net worth' number.

It's up to you how to use that number for yourself, but I can't think of many good uses for lumping the college fund in with retirement.

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Re: Should the money earmarked for certain expenses be part of net worth?

Post by luckybamboo » Sun Mar 05, 2017 1:24 am

So, if I understand it right, I am hearing that net worth isn't a meaningful number and shouldn't be paid attention to. In that case, it doesn't matter if I include it or not.

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Re: Should the money earmarked for certain expenses be part of net worth?

Post by HIinvestor » Sun Mar 05, 2017 1:32 am

Net worth is merely a point in time snapshot of you assets vs liabilities. It can be a useful barometer of whether you are making progress toward financial goals but shouldn't be obsessed over as it can go fluctuate some over time, especially when you're starting out and have some expensive items--replacing a vehicle, expensive house maintenance, relocating, expensive medical bills, etc.

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Re: Should the money earmarked for certain expenses be part of net worth?

Post by cme » Sun Mar 05, 2017 1:33 am

I find Net Worth useful to track my progress towards financial independence, as described below.

I generally exclude 529 college savings for basically the same reason as traveltoomuch.

But if I'm trying to figure out how much $ I need vs. what I have, I add the cost of college into the former and any savings against that into the latter. For example, using made up numbers: if I was targeting $1MM of savings + a fully paid off house worth $300K + college tuition of $60K, then I'd compare $1.36MM against what I had stacked up against that, inclusive of the $60K in 529s.

[In other words, you might think of the commitment you made to fund a specific $ amount of college expenditures as a liability, which should be a deduction from your NW. In that case, the assets that will offset that are highly relevant to the NW computation.]

For the other stuff (home improvement fund, car savings fund), cash is fungible - until the the expenditure is made, the cash belongs to me and has value (and I can always repurpose it to another use or not spend it at all), so I include it in my NW.

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Re: Should the money earmarked for certain expenses be part of net worth?

Post by Choy » Sun Mar 05, 2017 1:45 am

Short-answer: Yes, I do include it.

Long-answer:
I track and view my net worth as I would a financial statement for a company. It's a snapshot in time and backward looking as opposed to forward looking. Looking at a net worth report over time (I update it at the end of each month) shows me a history of my financial progress (when I've made large expenditures, when I've had large increases in income, when the market was down, when it was up, etc...).

Assets includes everything at that point in time -- cash, investments, etc...
Liabilities only include unsecured credit card debt, outstanding mortgage balances, student loans, etc...

Normal expenses like rent are included in the calculation only in so far as they've 1) already been incurred and paid thereby reducing the asset number reported or 2) have been incurred and not paid (credit card) thereby increasing the liabilities number.

Expenses such as earmarked savings for a vacation, future tax liabilities, college expenses for children etc... are all forward looking and not part of my networth calculation. Some things like college expenses may not even occur in the future. When they do occur then they are reflected in the net worth report.

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Re: Should the money earmarked for certain expenses be part of net worth?

Post by Epsilon Delta » Sun Mar 05, 2017 3:29 am

Choy wrote:I track and view my net worth as I would a financial statement for a company. It's a snapshot in time and backward looking as opposed to forward looking. Looking at a net worth report over time (I update it at the end of each month) shows me a history of my financial progress (when I've made large expenditures, when I've had large increases in income, when the market was down, when it was up, etc...).

Expenses such as earmarked savings for a vacation, future tax liabilities, college expenses for children etc... are all forward looking and not part of my networth calculation. Some things like college expenses may not even occur in the future. When they do occur then they are reflected in the net worth report.

Many company financial statements include "capital commitments" which are funds earmarked for future expenses and seem analogous to the dedicated college fund. Under current standards I believe the capital commitments are not actually on the balance sheet but are hidden in the notes. But everything interesting is hidden in the notes.

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Re: Should the money earmarked for certain expenses be part of net worth?

Post by randomizer » Sun Mar 05, 2017 5:43 am

I include it. Just know that if you are going to spend it then it doesn't constitute part of your retirement portfolio. That's a sum that you should calculate separately.

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Re: Should the money earmarked for certain expenses be part of net worth?

Post by retiredjg » Sun Mar 05, 2017 7:18 am

luckybamboo wrote:So, if I understand it right, I am hearing that net worth isn't a meaningful number and shouldn't be paid attention to. In that case, it doesn't matter if I include it or not.

Some people find it meaningful. Others don't. And people apparently have different definitions of what "net worth" is.

What do you use that information for? If it is useful to you, it makes sense to pay attention to it.

What is meaningful to probably everybody is how much is in your retirement portfolio and this can include things that are not in actual retirement accounts. Is that what you are really interested in?

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Re: Should the money earmarked for certain expenses be part of net worth?

Post by Cosmo » Sun Mar 05, 2017 7:37 am

Epsilon Delta wrote:
Choy wrote:I track and view my net worth as I would a financial statement for a company. It's a snapshot in time and backward looking as opposed to forward looking. Looking at a net worth report over time (I update it at the end of each month) shows me a history of my financial progress (when I've made large expenditures, when I've had large increases in income, when the market was down, when it was up, etc...).

Expenses such as earmarked savings for a vacation, future tax liabilities, college expenses for children etc... are all forward looking and not part of my networth calculation. Some things like college expenses may not even occur in the future. When they do occur then they are reflected in the net worth report.

Many company financial statements include "capital commitments" which are funds earmarked for future expenses and seem analogous to the dedicated college fund. Under current standards I believe the capital commitments are not actually on the balance sheet but are hidden in the notes. But everything interesting is hidden in the notes.



I heard Enron had some interesting stuff hidden in the notes. :-)

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Re: Should the money earmarked for certain expenses be part of net worth?

Post by ruralavalon » Sun Mar 05, 2017 8:16 am

luckybamboo wrote:Do you add money saved for future expenses(to be made in 2-4 years) like purchasing a car, college savings, remodeling the home etc. be counted in the calculation of net worth?
This is my thinking -
For eg. We have saved about $60,000 for our daughter's college. She will be attending college in Fall 2018. If we add it to the today's networth then the networth will suddenly dip in next 2-4 years as we write checks to the college.
So, do you guys add it to your net worth calculation or just leave it out of it?
Please explain why?

Yes, include any asset in net worth.

Omit an asset or liability and you are not calculating net worth.
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Choy
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Re: Should the money earmarked for certain expenses be part of net worth?

Post by Choy » Sun Mar 05, 2017 9:19 am

Epsilon Delta wrote:Many company financial statements include "capital commitments" which are funds earmarked for future expenses and seem analogous to the dedicated college fund. Under current standards I believe the capital commitments are not actually on the balance sheet but are hidden in the notes. But everything interesting is hidden in the notes.


Sure, you can go ahead and add an asterisk next to your number for reference, but those notes don't actually affect the numbers. To me, if you're going to count future liabilities against your net worth, then you should be consistent and count future income and assets. Essentially you're trying to determine a valuation for yourself and be forward looking. So why not do it properly? Count expected SSI, regular salary, expected growth of dividends, etc...

Think of it this way, you earmark $10K for an expense you expect to incur in a year and count that money against your net worth. Most likely what will happen, is you'll add more money for future cash flow -- perhaps more $10K -- over the next year and then pay off that expense. In that case, it's like you never touched the earmarked money and paid out of future cash flow. On the other hand you may not even incur the expense because of a change in situation -- that shouldn't all of a sudden make you wealthier on paper. You always had the money, you just didn't spend it.

Being forward looking is a lot harder than just adding and subtracting current numbers and will always be based on assumption to some extent.

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Re: Should the money earmarked for certain expenses be part of net worth?

Post by bottlecap » Sun Mar 05, 2017 9:30 am

What do you want to treat it as? Seems like semantics to me. Net worth isn't a contest or a critical line that must not dip under any circumstances..

JT

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Re: Should the money earmarked for certain expenses be part of net worth?

Post by MikeG62 » Sun Mar 05, 2017 9:30 am

I do not include any accounts I hold that are earmarked for specific purposes (other than funding our lifestyles in retirement) in my net worth. So for example, college savings for my daughter (still in college) I do not include. Funds I have set aside for my daughter's weddings I do not include.

All other accounts (brokerage, retirement, bank) I include because those are the accounts that I will use to fund our expenses in retirement. If it helps to know, we are in retirement now. I tracked our finances this way even before we retired.

The only reason why I include all accounts in any analysis (including our home and personal property) is when looking at the value of our estate (for estate planning purposes). Reason being is if my wife and I die, these accounts I do not include in my net worth analysis will be part of our estate.
Last edited by MikeG62 on Sun Mar 05, 2017 10:01 am, edited 1 time in total.

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Re: Should the money earmarked for certain expenses be part of net worth?

Post by stan1 » Sun Mar 05, 2017 9:46 am

I view $1 as $1. Doesn't matter whether it is in a 401K, IRA, Taxable investment account, CD, TreasuryDirect I-Bond, checking account, wallet, or mattress. If I spend $30K on a new car the corresponding drop in net worth reminds me that I need to take steps to watch and adjust my future spending.

I realize some people make this more complicated by accounting for taxes so that $1 in a CD = $0.90 in a taxable equity fund = $0.70 in a Traditional 401K. While logically that's a more realistic model I don't feel the added complexity is needed to meet my needs.

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Re: Should the money earmarked for certain expenses be part of net worth?

Post by Nate79 » Sun Mar 05, 2017 10:56 am

Net worth is net worth. Either you calculate it correctly or you don't.

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Re: Should the money earmarked for certain expenses be part of net worth?

Post by luckybamboo » Sun Mar 05, 2017 7:48 pm

bottlecap wrote:What do you want to treat it as? Seems like semantics to me. Net worth isn't a contest or a critical line that must not dip under any circumstances..

JT


The purpose here isn't to compete or anything of that sort. Just to track and make sure that we are making steady progress towards financial independence. We track account balances QUARTERLY on each of our financial accounts (Bank, Brokerage, Retirement etc) and Fixed Assets (Home, Cars) and subtract the liabilities (mortgage, car loan, credit card balance) and compute a figure which is Net Worth. We have done this since 2007 and it has given us a nice snapshot of where we stand.
But, this got me thinking about this kind of large expense that we will face as we send two kids to college from 2018-2026 where the large dips in college saving accounts will make the graph look pretty flat and might mask some other issues.

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Re: Should the money earmarked for certain expenses be part of net worth?

Post by *3!4!/5! » Sun Mar 05, 2017 8:16 pm

This is easy. Do it both ways. Same with other things you're not sure whether to include. Just have different totals for different purposes. A spreadsheet can easily calculate a bunch of totals.

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Re: Should the money earmarked for certain expenses be part of net worth?

Post by Choy » Sun Mar 05, 2017 8:21 pm

luckybamboo wrote:But, this got me thinking about this kind of large expense that we will face as we send two kids to college from 2018-2026 where the large dips in college saving accounts will make the graph look pretty flat and might mask some other issues.


That's exactly how it should look. What issues do you think it would mask?
Last edited by Choy on Tue Mar 07, 2017 10:59 pm, edited 1 time in total.

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Re: Should the money earmarked for certain expenses be part of net worth?

Post by gasdoc » Sun Mar 05, 2017 8:31 pm

I consider the 529 money a little different from other expenses that are "earmarked." In this case, the money has actually been "promised" to our child, and has her name on it. I consider this money that is already "spent." This is the only expense I don't count in my net worth.

gasdoc

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Re: Should the money earmarked for certain expenses be part of net worth?

Post by goodenyou » Mon Mar 06, 2017 9:30 pm

Technically yes. I think what you are describing are sunk costs. I don't include them. An example of a sunk cost is the kids' cost of education and their 529. I am spending it now and hope to spend it all on their education. I don't expect to have even a dime left over. It is also not an insignificant amount of money. It is close to 5 years of expenses in retirement. Reducing my net worth forces me to save more to get to my number.
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Re: Should the money earmarked for certain expenses be part of net worth?

Post by KlangFool » Mon Mar 06, 2017 9:47 pm

luckybamboo wrote:Do you add money saved for future expenses(to be made in 2-4 years) like purchasing a car, college savings, remodeling the home etc. be counted in the calculation of net worth?



luckybamboo,

I do not save money for the future expense. I do not see why people choose to complicate their lives by doing that. My cash flow / annual savings is large enough to cover any of those future expenses. So, there is no reason to overcomplicate my life.

I have only one pool of money.

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Re: Should the money earmarked for certain expenses be part of net worth?

Post by bloom2708 » Mon Mar 06, 2017 9:50 pm

If I have $10k in a savings account and go buy a $10k car. Your net worth is (almost) the same after the purhase. Fees, taxes, registration, etc. So not exactly.

The problem is, the $10k car is worth $9k, then $8k, then $6k, etc. You did a net worth transfer (asset to asset) to a quickly depreciating asset. But for now, cash is cash. We have Taxes, Vacation, Car and Emergency Funds hanging out, waiting to be spent or not spent (EF).
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Re: Should the money earmarked for certain expenses be part of net worth?

Post by Dandy » Tue Mar 07, 2017 9:31 am

To me net worth is a nice number to know but has no real meaning or usefulness. How much I have in my retirement plans has meaning as do other elements of net worth calculation but the sum is a nice to know number but little else. You should ask yourself what actions will the result of the net worth calculation likely prompt. If your net worth is up 20k next year - what will you do? Smile? pay down debt? change your investment allocation?

If you are thinking of being terribly strapped for money e.g. lose job and have major expenses/debt you will probably use the money set aside for educating your child. But, if you are looking at what type of shape you are in related to retirement you will probably leave the money set aside for education, vacation, car purchases etc. out. I guess if you have a lot of rental properties it might be important to know how the equity in those buildings compares to their debt. But for a normal homeowner with a mortgage that will expire when they retire it won't affect their retirement nest egg as far as being a drain on assets/income.

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Re: Should the money earmarked for certain expenses be part of net worth?

Post by simplesimon » Tue Mar 07, 2017 9:44 am

Choy wrote:
luckybamboo wrote:But, this got me thinking about this kind of large expense that we will face as we send two kids to college from 2018-2026 where the large dips in college saving accounts will make the graph look pretty flat and might mask some other issues.


That's how exactly how it should look. What issues do you think it would mask?


+1

I think this may be the heart of the OP's issue.

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Re: Should the money earmarked for certain expenses be part of net worth?

Post by sunny_socal » Tue Mar 07, 2017 9:51 am

You should include everything. I have my house, 401k, vehicles, HSA, 529, cash, ROTH, IRA... all of it. It's an answer to this question: If I died today, what would my wife & kids be left with?

As others have said it makes for an interesting graph in my Excel sheet but I can't eat it! :beer

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Re: Should the money earmarked for certain expenses be part of net worth?

Post by bloom2708 » Tue Mar 07, 2017 9:58 am

KlangFool wrote:
luckybamboo wrote:Do you add money saved for future expenses(to be made in 2-4 years) like purchasing a car, college savings, remodeling the home etc. be counted in the calculation of net worth?



luckybamboo,

I do not save money for the future expense. I do not see why people choose to complicate their lives by doing that. My cash flow / annual savings is large enough to cover any of those future expenses. So, there is no reason to overcomplicate my life.

I have only one pool of money.

KlangFool


If you are going to buy a new car for $25k in June and pay cash, how do you save for the purchase? I don't think you are saying that on the last paycheck before the purchase you just take $25k from that paycheck and spend it on the car. The money is somewhere. You maybe didn't give it a name/purpose until you bought the car. You "saved" it in a single account that is fungible and decided to use some of it on a car. It isn't much more complicated to have a second checking/savings, call it "car fund" and put $25k of your savings in it. Even if you have one pool of money, you saved some of it or invested (long term) some of it.
"We are here not to please but to provoke thoughtfulness" Unknown Boglehead

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Re: Should the money earmarked for certain expenses be part of net worth?

Post by KlangFool » Tue Mar 07, 2017 10:02 am

bloom2708 wrote:
KlangFool wrote:
luckybamboo wrote:Do you add money saved for future expenses(to be made in 2-4 years) like purchasing a car, college savings, remodeling the home etc. be counted in the calculation of net worth?



luckybamboo,

I do not save money for the future expense. I do not see why people choose to complicate their lives by doing that. My cash flow / annual savings is large enough to cover any of those future expenses. So, there is no reason to overcomplicate my life.

I have only one pool of money.

KlangFool


If you are going to buy a new car for $25k in June and pay cash, how do you save for the purchase? I don't think you are saying that on the last paycheck before the purchase you just take $25k from that paycheck and spend it on the car. The money is somewhere. You maybe didn't give it a name/purpose until you bought the car. You "saved" it in a single account that is fungible and decided to use some of it on a car. It isn't much more complicated to have a second checking/savings, call it "car fund" and put $25k of your savings in it. Even if you have one pool of money, you saved some of it or invested (long term) some of it.


bloom2708,

I just use my 1 years emergency fund to buy the car. Then, I refill my emergency fund.

KlangFool

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Re: Should the money earmarked for certain expenses be part of net worth?

Post by bottlecap » Tue Mar 07, 2017 10:28 am

luckybamboo wrote:
bottlecap wrote:What do you want to treat it as? Seems like semantics to me. Net worth isn't a contest or a critical line that must not dip under any circumstances..

JT


The purpose here isn't to compete or anything of that sort...But, this got me thinking about this kind of large expense that we will face as we send two kids to college from 2018-2026 where the large dips in college saving accounts will make the graph look pretty flat and might mask some other issues.


Then don't include it. Or do and subtract it out to make sure it's not masking any other issues.

Good luck,

JT

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Re: Should the money earmarked for certain expenses be part of net worth?

Post by *3!4!/5! » Tue Mar 07, 2017 4:36 pm

*3!4!/5! wrote:This is easy. Do it both ways. Same with other things you're not sure whether to include. Just have different totals for different purposes. A spreadsheet can easily calculate a bunch of totals.


Your net worth is a vector not a scalar.
It's also a function of time.
Also, some variables may be random variables.

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Re: Should the money earmarked for certain expenses be part of net worth?

Post by avalpert » Tue Mar 07, 2017 7:12 pm

goodenyou wrote:Technically yes. I think what you are describing are sunk costs. I don't include them. An example of a sunk cost is the kids' cost of education and their 529. I am spending it now and hope to spend it all on their education. I don't expect to have even a dime left over. It is also not an insignificant amount of money. It is close to 5 years of expenses in retirement. Reducing my net worth forces me to save more to get to my number.

No, it most certainly is not a sunk cost (not by any technical definition nor by any common or useful definition) - it hasn't even accrued yet. What if your kids education costs less than what you put int he 529 - is that money gone?

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Re: Should the money earmarked for certain expenses be part of net worth?

Post by avalpert » Tue Mar 07, 2017 7:14 pm

Choy wrote:
luckybamboo wrote:But, this got me thinking about this kind of large expense that we will face as we send two kids to college from 2018-2026 where the large dips in college saving accounts will make the graph look pretty flat and might mask some other issues.


That's how exactly how it should look. What issues do you think it would mask?

Exactly, when you make large purchases it will show as large dips in your net worth - smoothing those out by removing it over time as you set aside the money is what is likely to mask issues.

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Re: Should the money earmarked for certain expenses be part of net worth?

Post by ram » Wed Mar 08, 2017 12:45 am

"Net Worth" has a definition (mentioned above). So the answer to your question is - YES.

But I also track "How much do I have for my retirement"
I do not include the 529 Ac balances here.
Ram

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Re: Should the money earmarked for certain expenses be part of net worth?

Post by kmok » Wed Mar 08, 2017 10:21 am

avalpert wrote:
Choy wrote:
luckybamboo wrote:But, this got me thinking about this kind of large expense that we will face as we send two kids to college from 2018-2026 where the large dips in college saving accounts will make the graph look pretty flat and might mask some other issues.


That's how exactly how it should look. What issues do you think it would mask?

Exactly, when you make large purchases it will show as large dips in your net worth - smoothing those out by removing it over time as you set aside the money is what is likely to mask issues.


When you made large purchases, the value of the purchases don't go to zero overnight. For example, just because you bought a new car doesn't mean the car no longer worth anything. You can sell it to the dealer or private party at a lower value. So it makes sense to include it in your net worth and depreciate the value of the car overtime after you made the purchase, rather than removing it from the net worth over time before you made the purchase.
Last edited by kmok on Wed Mar 08, 2017 3:23 pm, edited 1 time in total.

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Re: Should the money earmarked for certain expenses be part of net worth?

Post by TomatoTomahto » Wed Mar 08, 2017 10:34 am

gasdoc wrote:I consider the 529 money a little different from other expenses that are "earmarked." In this case, the money has actually been "promised" to our child, and has her name on it. I consider this money that is already "spent." This is the only expense I don't count in my net worth.

gasdoc

And, when it's spent, your net worth goes down and her human capital goes up. One hopes :D

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Re: Should the money earmarked for certain expenses be part of net worth?

Post by randomguy » Wed Mar 08, 2017 11:23 am

bloom2708 wrote:
KlangFool wrote:
luckybamboo wrote:Do you add money saved for future expenses(to be made in 2-4 years) like purchasing a car, college savings, remodeling the home etc. be counted in the calculation of net worth?



luckybamboo,

I do not save money for the future expense. I do not see why people choose to complicate their lives by doing that. My cash flow / annual savings is large enough to cover any of those future expenses. So, there is no reason to overcomplicate my life.

I have only one pool of money.

KlangFool


If you are going to buy a new car for $25k in June and pay cash, how do you save for the purchase? I don't think you are saying that on the last paycheck before the purchase you just take $25k from that paycheck and spend it on the car. The money is somewhere. You maybe didn't give it a name/purpose until you bought the car. You "saved" it in a single account that is fungible and decided to use some of it on a car. It isn't much more complicated to have a second checking/savings, call it "car fund" and put $25k of your savings in it. Even if you have one pool of money, you saved some of it or invested (long term) some of it.



The problem is you don't need a car fund. You need car fund, vacation fund, roof fund, water heater fund, remodeling fund, driveway fund, and every other "big" purchase. Why not just buy a few more bonds and call it a day?

The only number I exclude are 529s as they are a one time expense. The rest are recurring expenses. I will need multiple new cars over the next 50 years, take who knows how many vacations, home remodels, and so on.

Except of course if I am bragging online. Then I throw everything in (car is worth at least 20k, heck furniture can probably get 5k) to try and impress people with the biggest number I can justify.:)

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Re: Should the money earmarked for certain expenses be part of net worth?

Post by bloom2708 » Wed Mar 08, 2017 11:53 am

I was (lightly) taking issue with KlangFool's statement "I do not save money for the future expense".

Then he said "I take the money from my Emergency Fund" (to buy a new XXX). "Then I refill my Emergency Fund...".

It is all in the nuances..saving or refilling or transferring...1 account, 5 accounts, 10 accounts...the money has to come from somewhere or set aside to refill. It had to be "saved" in the Emergency Fund in the first place or it would not be there. For most people you save for short term things and invest for the long haul.

Everything is part of your net worth. It may not be worth the hassle of counting/determining the value of everything that has value. Cash in a savings account has value. Pre-spent or not pre-spent.
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Re: Should the money earmarked for certain expenses be part of net worth?

Post by wolf359 » Wed Mar 08, 2017 12:21 pm

I actually like KlangFool's approach, and used to use that as well.

The problem is that my DW doesn't work well that way. I have a hard time saving our excess unless we put a name to each dollar. She can't visualize the need for "savings," she is happier "saving for a car."

In practice, we earmark some money for specific purposes, and we keep a positive cash flow so we also have general savings.

I use my net worth calculations to determine investment net worth. I don't include funds that are earmarked for expenses in that. I periodically will calculate total net worth -- that includes everything. Investment net worth is useful for determining how long we could live off our assets (or how close we are to retirement.) Total net worth isn't really useful for anything but a benchmark.

So the real answer is: Whatever works for you.

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Re: Should the money earmarked for certain expenses be part of net worth?

Post by KlangFool » Wed Mar 08, 2017 12:24 pm

bloom2708 wrote:I was (lightly) taking issue with KlangFool's statement "I do not save money for the future expense".

Then he said "I take the money from my Emergency Fund" (to buy a new XXX). "Then I refill my Emergency Fund...".

It is all in the nuances..saving or refilling or transferring...1 account, 5 accounts, 10 accounts...the money has to come from somewhere or set aside to refill. It had to be "saved" in the Emergency Fund in the first place or it would not be there. For most people you save for short term things and invest for the long haul.

Everything is part of your net worth. It may not be worth the hassle of counting/determining the value of everything that has value. Cash in a savings account has value. Pre-spent or not pre-spent.


bloom2708,

<< It is all in the nuances..saving or refilling or transferring...1 account, 5 accounts, 10 accounts...>>
<< Everything is part of your net worth. It may not be worth the hassle of counting/determining the value of everything that has value. >>

And, that lies the whole philosophy of money and how to use the money to live your life. Some folks like me use the money to live our lives. We do not use our lives to count money. There are choices:

A) Have one account/bucket for each short-term expense and spend countless amount of time to keep track of the money.

Or,

B) Have a big emergency fund to cover all the short-term expense.

Ditto,

A) Budget every expense item.

Or,

B) "Pay Yourself First" -> save the right amount of money every paycheck and then just spend the rest.

KlangFool

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Re: Should the money earmarked for certain expenses be part of net worth?

Post by an_asker » Wed Mar 08, 2017 12:32 pm

retiredjg wrote:
luckybamboo wrote:So, if I understand it right, I am hearing that net worth isn't a meaningful number and shouldn't be paid attention to. In that case, it doesn't matter if I include it or not.

Some people find it meaningful. Others don't. And people apparently have different definitions of what "net worth" is.

What do you use that information for? If it is useful to you, it makes sense to pay attention to it.

What is meaningful to probably everybody is how much is in your retirement portfolio and this can include things that are not in actual retirement accounts. Is that what you are really interested in?

It is pretty important if you are about to proclaim that you have entered the N comma club ;-) [or, to rephrase, if you will fall off the club in two years - all other things being equal - because of tuition payments, should you put an asterisk in the subject line?]

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Re: Should the money earmarked for certain expenses be part of net worth?

Post by White Coat Investor » Wed Mar 08, 2017 12:56 pm

retiredjg wrote:I don't see how "net worth" is a very useful number to know. But if you have a use for it, decide whether to add in the college expenses based on the use you have for knowing your net worth.


I disagree. I think it is super useful, particularly for someone who has never calculated it before. It is the measure of wealth. As far as your personal financial numbers go, it certainly belongs in the top five with things like:

Gross Income
Savings Rate
Effective tax rate
Marginal tax rate
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Re: Should the money earmarked for certain expenses be part of net worth?

Post by avalpert » Wed Mar 08, 2017 1:02 pm

kmok wrote:
avalpert wrote:
Choy wrote:
luckybamboo wrote:But, this got me thinking about this kind of large expense that we will face as we send two kids to college from 2018-2026 where the large dips in college saving accounts will make the graph look pretty flat and might mask some other issues.


That's how exactly how it should look. What issues do you think it would mask?

Exactly, when you make large purchases it will show as large dips in your net worth - smoothing those out by removing it over time as you set aside the money is what is likely to mask issues.


When you made large purchases, the value of the purchases don't go to zero overnight. For example, just because you bought a new car don't mean the car no longer with anything. You can sell it to the dealer or private party at a lower value. So ît makes sense to include it in your net worth and depreciate the value of the car overtime after you made the purchase, rather than removing it from the net worth over time before you made the purchase.

That depends on the purchase - the value of the car doesn't but the value of your tuition expense does. Sure, if you have an asset that should be part of your net worth too.

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Re: Should the money earmarked for certain expenses be part of net worth?

Post by TomatoTomahto » Wed Mar 08, 2017 3:05 pm

White Coat Investor wrote:
retiredjg wrote:I don't see how "net worth" is a very useful number to know. But if you have a use for it, decide whether to add in the college expenses based on the use you have for knowing your net worth.


I disagree. I think it is super useful, particularly for someone who has never calculated it before. It is the measure of wealth. As far as your personal financial numbers go, it certainly belongs in the top five with things like:

Gross Income
Savings Rate
Effective tax rate
Marginal tax rate

Quicken's front page has a graph of net worth that is calculated every time I open it up. I look at it a bit, but the number that I find satisfying is the "change since 12 months ago." Between saving a good part of what is left after taxes and tuition, the generous market, and a great year at work for my wife, I get jazzed looking at that (although I probably know better :D ). It will be a drag to have that number turn negative, as it probably will during retirement.

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Re: Should the money earmarked for certain expenses be part of net worth?

Post by lazydavid » Wed Mar 08, 2017 3:12 pm

MikeG62 wrote:Funds I have set aside for my daughter's weddings I do not include.


You either have a mis-placed apostrophe there, or a very pessimistic view on your offspring's ability to choose a mate. :mrgreen:

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Re: Should the money earmarked for certain expenses be part of net worth?

Post by kmok » Wed Mar 08, 2017 3:21 pm

avalpert wrote:
kmok wrote:
avalpert wrote:
Choy wrote:
luckybamboo wrote:But, this got me thinking about this kind of large expense that we will face as we send two kids to college from 2018-2026 where the large dips in college saving accounts will make the graph look pretty flat and might mask some other issues.


That's how exactly how it should look. What issues do you think it would mask?

Exactly, when you make large purchases it will show as large dips in your net worth - smoothing those out by removing it over time as you set aside the money is what is likely to mask issues.


When you made large purchases, the value of the purchases don't go to zero overnight. For example, just because you bought a new car doesn't mean the car no longer worth anything. You can sell it to the dealer or private party at a lower value. So it makes sense to include it in your net worth and depreciate the value of the car overtime after you made the purchase, rather than removing it from the net worth over time before you made the purchase.

That depends on the purchase - the value of the car doesn't but the value of your tuition expense does. Sure, if you have an asset that should be part of your net worth too.


Net worth should not be that subjective. The same person can choose to earmark all expenses in his/her lifetime or not earmark anything. This same person at the same time can have two different net worth that is completely different and not even close.

Expenses that have not yet been incurred should not deduct from your net worth. Just because you earmark your tuition fee for next year doesn't mean the expenses have incurred this year, thus shouldn't impact net worth as of now.

Even if you paid tuition annually, you can still calculate how much tuition you incurred this month by subtracting 1/12th of the annual tuition for this month to avoid large dips in your net worth.

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Re: Should the money earmarked for certain expenses be part of net worth?

Post by inbox788 » Wed Mar 08, 2017 3:35 pm

luckybamboo wrote:The purpose here isn't to compete or anything of that sort. Just to track and make sure that we are making steady progress towards financial independence. We track account balances QUARTERLY on each of our financial accounts (Bank, Brokerage, Retirement etc) and Fixed Assets (Home, Cars) and subtract the liabilities (mortgage, car loan, credit card balance) and compute a figure which is Net Worth. We have done this since 2007 and it has given us a nice snapshot of where we stand.
But, this got me thinking about this kind of large expense that we will face as we send two kids to college from 2018-2026 where the large dips in college saving accounts will make the graph look pretty flat and might mask some other issues.

I find net worth to be a useful figure. If you have large expenditures, you can have flat or even dipping net worth for some time. It's not going to be a smooth curve. And if you're going to project expenses into the future, also project the future income and potential growth. It's all estimates and may not completely come to fruition, like a budget, but it's a good goal to track if you have the inclination.

Accept the limitations of the single number and look beyond that to the multiple buckets. I keep a bucket of pre-retirement funds and a wish list of expenses that need to be funded. I fill the college and retirement buckets first, and some of the pre-retirement spending, but it's discretionary and those can be shifted over to other buckets if needed.

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