Net worth is overrated

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an_asker
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Net worth is overrated

Post by an_asker »

I get it that it is nice to look at one's net worth and be happy when you turn over the number of commas, i.e., go from zero to one to two and so on. However, we/I tend to pay much more importance to net worth than we/I should be. I got this brainwave only over this weekend that net worth is really over-rated though, obviously, we all realize that net worth is not all there is to retirement planning.

For sure, whenever folks ask about retirement plans, the respondents ask about complete details to determine whether the asker can or cannot retire right now. However, during any phase of the working career, we tend to still focus on net worth (or at least, I do), and we probably are giving undue weightage to it. Here is why I don't think we should really be paying as much attention as we currently do to this figure:

- higher net worth is only better if it is with the same expectation of spending: this is a no-brainer. If person A has higher expectations of spending than person B does, A had better have a higher net worth than B to compensate for the higher spending expectation to get the same amount of happiness in upon retirement.

- net worth does not include inheritance: another no-brainer. If you are expecting a six (or even seven!) figure inheritance, you would not be including it in your net worth. But your net worth does not need to be anywhere close to someone else, even if you have the same exact expectation of spending. For the very reason that you are going to be taken care of when you retire!!

- a comparison of net worth is not really an apples to apples comparison: this goes across a) age as well as b) proportion of taxable vs. tax-deferred accounts! Ironically enough, in this case, the "tax deferred" accounts are actually to your disadvantage! In other words, a taxable account, say $500k, is much better than a "tax deferred" account. Why? Because on the former, you've been paying taxes as you go, whereas on the latter, you will still be owing taxes. Not everyone discounts the tax deferred accounts in his/her net worth - and how can he/she, when the actual taxes are still fuzzy? Same thing goes with the age comparison - someone who is older is pretty much set with the current tax rates, whereas they are a much bigger wildcard/unknown to someone who is younger.

- net worth does not include anticipated medical expenses: if A's medical history indicates that you will need more medical care than B, then A had better have a much higher net worth to compensate for these expenses. Another side of the same coin is that if B has a much better medical insurance provided by his/her employer (veteran/government employee, megacorp, etc), he/she can expect lesser expenses during retirement even if A and B are on the same track with respect to current and anticipated medical needs.

- net worth does not include pension. This is another biggie. Folks never (or very rarely) include pension in the net worth. But a pension is a secure source of income in retirement, and definitely should (and is) considered when figuring whether it is a good time to retire or not. However, when looking at net worth, it is rare to include a pension in it.

Bottom line: Just because one's net worth has a comma, or two, or three, does not really mean that one is better off than someone else who has (comparatively speaking) a net worth with zero, one or two commas. And vice versa, of course :-)
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Re: Net worth is overrated

Post by alfaspider »

Good overall point that everyone's situation is different.

I've always included my pension in my net worth, but my company provides an annual lump sum distribution calculation every year (i.e., what I could roll over into an IRA if I left my company tomorrow), so it's rather easy to calculate what it's currently worth.

On inheritance: I think it can be dangerous to include this in your retirement planning unless the demise of the person(s) you are set to inherit from is immanent and you are fully appraised of their estate planning situation. Someone could decide to go hog-wild with spending in their later years, have an expensive long term care requirement, or decide to give everything to charity. There could be a contest over the will. You don't really know what you will inherit until the estate is probated.
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Re: Net worth is overrated

Post by bloom2708 »

I can't compare our net worth to anyone else. I don't know their net worth or spending.

I do think it is valuable to track your own progress. Month over month, year over year. Just be consistent and conservative.

Yogi Berra said it best...

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Re: Net worth is overrated

Post by marti038 »

Perhaps it would be more accurate to say that net worth is relative to one's personal circumstances?
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Re: Net worth is overrated

Post by mhc »

Net worth is important to me because my human capital is decreasing as I age. I need something to replace it if I want to pay the bills. My investments, which are the vast majority of my net worth and will pay the bills when I retire. I also need to consider SS and medicare to help make ends meet in retirement.

I do not foresee getting an inheritance or other windfall that I have not exchanged my human capital for.

Right now I exchange my human capital for a pay check. Some day I will start exchanging my investments for a "paycheck". I could also exchange my house for a "paycheck".

I agree that net worth is not the only factor, but it is important to many. Spending is the other important piece to consider.
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Re: Net worth is overrated

Post by midareff »

It's just a way of keeping score and tracking progress. So is a box score in baseball, half time in football and so forth.
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Re: Net worth is overrated

Post by bigred77 »

I don't know that I agree. If I could only track one financial metric for my household, I'm pretty sure net worth would be my choice.

I'm not saying it's perfect. I'm not saying in isolation it is a good comparative metric to decide one household is "doing better" than another. But I do think it does it good job of tracking wealth accumulation.

Regardless of circumstances (pension, inheritance, medical condition), I always want to see my net worth trending upwards (prior to retirement and also hopefully in retirement). Everything else you listed are just factors in determining whether or not my net worth has hit critical mass.
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Re: Net worth is overrated

Post by SQRT »

Everyone's circumstances are different for sure. I do include my pension in my net worth, at least in my head as it is easy to calculate. Not sure why spending should be an issue other than to decide how much net worth you need to retire. In the end its cash flow that is most important in retirement and net worth can be a starting point to calculate that.
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Re: Net worth is overrated

Post by Admiral »

One needs a method and a scorecard to plan for one's financial future: Will I have enough accumulated (will I have a high enough "net worth"... since that's shorthand for monies accumulated minus debt) so that I can live without having a paycheck. And in what MANNER will I live: in the lifestyle that I enjoy now, or dining on cat food?

I'm not sure what other metric one might use. Some pension plans go bust, inheritances don't arrive when you want them to (or at all, or are lower than you planned) and so on.

The only thing you can use as a scorecard to see how you're doing is what you have TODAY. That's your net worth. All else is just projections.
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Re: Net worth is overrated

Post by an_asker »

marti038 wrote:Perhaps it would be more accurate to say that net worth is relative to one's personal circumstances?
Yes, that would be a very good summary :-). I just felt like a long essay after a weekend of no posts (from me)!! :sharebeer
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Re: Net worth is overrated

Post by an_asker »

bigred77 wrote:I don't know that I agree. If I could only track one financial metric for my household, I'm pretty sure net worth would be my choice.

I'm not saying it's perfect. I'm not saying in isolation it is a good comparative metric to decide one household is "doing better" than another. But I do think it does it good job of tracking wealth accumulation.

Regardless of circumstances (pension, inheritance, medical condition), I always want to see my net worth trending upwards (prior to retirement and also hopefully in retirement). Everything else you listed are just factors in determining whether or not my net worth has hit critical mass.
True. If you're comparing with your own history, it is THE tool to use. My point was that if you say "I am at two comma level" yes, you're better than yesterday when you were at 1.99 commas; but you might be a) much better or b) much worse than fellow two-comma persons, depending on what else is on your (or their) plate!
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Re: Net worth is overrated

Post by BW1985 »

I think the opposite is true. As the number of people with pensions continues to decline and the future state of social security unknown, net worth is all you can truly count on because you control it.
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Re: Net worth is overrated

Post by Nate79 »

Net worth is an extremely valuable metric. It may be underrated.... It is obvious that the specific situation surrounding the value of the net worth is also very important.
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Re: Net worth is overrated

Post by bottlecap »

marti038 wrote:Perhaps it would be more accurate to say that net worth is relative to one's personal circumstances?
This seems to be the jist, which is not big news.

In fact, your total retirement savings (which is also not the same as "net worth") is still important, no matter how you slice it. It's just that if you have an pension, an ironclad lock on a big inheritance, or some other source of retirement income, you need less savings.

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Re: Net worth is overrated

Post by mak1277 »

My net worth is valuable to me for my planning purposes. I'm not using it to keep score against others.
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Re: Net worth is overrated

Post by keystone »

Interesting points.

Yes, like most respondents, calculating net worth is valuable for my personal circumstances but not nearly as useful when comparing to others. And like you said, just looking at net worth doesn't tell the whole story. Would you rather have a $2 million paid off house and no other liquid assets or $1.5 million in invested assets and $500K in home equity? Probably most of us would choose the latter even though they're the same on paper.
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Re: Net worth is overrated

Post by Youngblood »

I think it is of value in determining many things in regards to spending, retirement and financial independence.
Not in isolation but, very important.
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Re: Net worth is overrated

Post by knpstr »

keystone wrote:Yes, like most respondents, calculating net worth is valuable for my personal circumstances but not nearly as useful when comparing to others.
I find it isn't too useful for one to compare their finances with others. Comparing to others doesn't result in much good. It often leads to misguided envy/jealous/resentment/pride and a host of other problems that one should try to their best to avoid.

I think maybe it is best to "compete" with yourself only. By that I mean to try to better your own situation as compared to where you've been in the past. Forget where everyone else is at and what they're doing. It doesn't matter. Just do the best you can do.

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Re: Net worth is overrated

Post by letsgobobby »

it matters a lot for estate planning.
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Re: Net worth is overrated

Post by Sheepdog »

Will we really have enough to finish our life?, my wife may ask. Just an occasional reminder of where we started, where we have been and where we are, relaxes her and makes her smile. Our net worth reminder is not overrated for my love.
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Re: Net worth is overrated

Post by goodenyou »

Net worth has little meaning and is overrated when it is used to compare to others. The only relevant number to me is personal critical mass. It is the "number" that allows me to wake up without an alarm clock and live my life free of working to pay bills or accumulate assets. In golf there is a saying, "play your own ball". I use the same advice in my financial life as well.
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Re: Net worth is overrated

Post by bligh »

an_asker wrote: Bottom line: Just because one's net worth has a comma, or two, or three, does not really mean that one is better off than someone else who has (comparatively speaking) a net worth with zero, one or two commas. And vice versa, of course :-)
All valid points. But I would like you to show me ONE example in the real world where a person with a one comma net worth is financially better off than a person with a three comma net worth. :)

Sure there are a lot of things that are outside your control. But net worth is a really important metric for most people.
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Re: Net worth is overrated

Post by JDCarpenter »

knpstr wrote:
keystone wrote:Yes, like most respondents, calculating net worth is valuable for my personal circumstances but not nearly as useful when comparing to others.
I find it isn't too useful for one to compare their finances with others. Comparing to others doesn't result in much good. It often leads to misguided envy/jealous/resentment/pride and a host of other problems that one should try to their best to avoid.

I think maybe it is best to "compete" with yourself only. By that I mean to try to better your own situation as compared to where you've been in the past. Forget where everyone else is at and what they're doing. It doesn't matter. Just do the best you can do.

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Many of the factors pointed out in the original post are valid. But, for us, with no pensions (well, social is looking more likely than I'm willing to plan for), our portfolio value (net worth less house and mtg) is the only measuring device with which to project supportable spending (including taxes on deferred account withdrawals). Sure, someone who had the very same investment amounts solely in Roth and taxable accounts is way ahead of us, and a pension or two would be nice--but that isn't the hand we chose to be dealt. :happy
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Re: Net worth is overrated

Post by InvestorNewb »

Higher net worth = more freedom, comfortable living, and opportunity to make changes in this world

Maybe net worth is overrated if you are comparing two people who are already well-off.
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Re: Net worth is overrated

Post by nisiprius »

I've never been able to figure what legitimate financial planning purpose "net worth" is for, other than a) feeling smug, b) bragging, and c) allowing financial advisors and others to decide whether it's safe for them to try to sell you stuff that is only suitable for "high net worth" individuals.

From time to time I used to calculate it for purpose (a).

I don't see how it's any more relevant than a "thing count," a simple count of the number of things you possess. Or the total weight or volume of all your possessions.

Every specific financial planning purpose would require some other dollar number computed in some other way than "net worth."
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Re: Net worth is overrated

Post by Kenkat »

Net worth is in my opinion 50% of your financial picture, the other 50% being income, both current and future (social security, pensions, etc). Net worth can be converted to income and vice versa. Overrated is a relative term; I agree if net worth is ALL you are focused on, you are missing an important piece. However, it's a pretty important measure of overall financial well being.
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Re: Net worth is overrated

Post by GoldenFinch »

From a non-comparitive personal standpoint it's nice to see one's net worth change over time from negative to positive and then onward and upward.

If one uses net worth to figure out where they stand relative to some reference group (like their same age peers for example) it probably carries less meaning.
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Re: Net worth is overrated

Post by an_asker »

bligh wrote:
an_asker wrote: Bottom line: Just because one's net worth has a comma, or two, or three, does not really mean that one is better off than someone else who has (comparatively speaking) a net worth with zero, one or two commas. And vice versa, of course :-)
All valid points. But I would like you to show me ONE example in the real world where a person with a one comma net worth is financially better off than a person with a three comma net worth. :)

Sure there are a lot of things that are outside your control. But net worth is a really important metric for most people.
I don't know them personally, but I am sure there are a few heirs of billion dollar empires who currently have a low (or even negative) perrsonal net worth!

But one of the points I was also trying to make was to those who visit here and don't have high net worth and high salaries. I've seen threads opened by such folks, for instance the low (for a boglehead) income thread, where the respondents appear to be unhappy/dissatisfied with their net worth (especially with relation to the majority of the bogleheads). What I'm trying to say that if you have a good pension (as a government employee), you might actually be better off than your net worth indicates!
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Re: Net worth is overrated

Post by bligh »

an_asker wrote: I don't know them personally, but I am sure there are a few heirs of billion dollar empires who currently have a low (or even negative) perrsonal net worth!

What I'm trying to say that if you have a good pension (as a government employee), you might actually be better off than your net worth indicates!
You are correct of course, and your point on spending is extremely important too. The point I was making though was that net worth gives you flexibility and as a cushion in bad times. People can spend away enormous fortunes but that takes such carelessness as to literally make the news.

In the private sector, pension plans are rare and becoming rarer. If one has a federal pension he has a huge advantage of course. Personally if I were fortunate enough to have a pension, I would consider it a part of my "virtual" or "practical" net worth by multiplying it by 30x (ie a 3.3% withdrawal rate). So a 10K federal pension is worth about $300,000.

Converting back to a net worth is completely optional though. I track my net worth as a by product of tracking my portfolio. I am trying to get to 25-30x my annual expenses in retirement. It gives me a goal and something to focus on. If someone has a reliable pension/income stream that covers their entire expenses in retirement plus great medical coverage, beyond some liquid cash reserves, net worth can become irrelevant.
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Re: Net worth is overrated

Post by Snowjob »

Maybe we should measure retirement cashflows instead

SS + Pension + SPIA + (Investments /25)

That would be an apples to apples measuring stick.

Considering I'm looking at a SS haircut and no pension it's going to be a really long uphill slog... the comparable net worth figures to older folks who have full ss an pensions or younger folks who work in the public sector and are fortunate enough to still have one just don't make any sense.
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Re: Net worth is overrated

Post by carofe »

Instead of Net Worth I check the individual items in the list conforming the Net Worth:

* How much insecure debt we have to compare against the last year and to see if we need a more aggressive plan.
* Car value vs their loan balance
* House value vs House mortgage balance
* Investment Net worth balance to see if we are still on track
* How much cash savings we have vs insurances deductibles and insecure debts, EF goals, etc...

For me those are useful numbers. The Net Worth hides too much behind one number.
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Re: Net worth is overrated

Post by House Blend »

carofe wrote:The Net Worth hides too much behind one number.
+1. I have no use for net worth.

But I do see the need to keep track of some of the components that figure into net worth, such as loan balances and recurring expenses on the liability side, and investment portfolio and income on the asset side.

You can't answer "can we afford it" questions without some understanding of what is going on with both sides of the ledger.
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Re: Net worth is overrated

Post by Dead Man Walking »

I have never calculated my net worth. However, I know the value of my investment portfolio, what my pension income will be, and the value of my house according to my tax bill. The other stuff I own has value according to the guys on American Pickers. Since my pension has survivor benefits, with the value of my life insurance, I'm worth more dead than alive!

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Re: Net worth is overrated

Post by mlebuf »

House Blend wrote: +1. I have no use for net worth.
If anyone has no use for their net worth, I'll be happy to receive it. :sharebeer
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Re: Net worth is overrated

Post by Tycoon »

mlebuf wrote:
House Blend wrote: +1. I have no use for net worth.
If anyone has no use for their net worth, I'll be happy to receive it. :sharebeer
That makes two of us.
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Re: Net worth is overrated

Post by House Blend »

Tycoon wrote:
mlebuf wrote:
House Blend wrote: +1. I have no use for net worth.
If anyone has no use for their net worth, I'll be happy to receive it. :sharebeer
That makes two of us.
Did I forget to mention that my net worth is negative? ;-)
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Re: Net worth is overrated

Post by an_asker »

House Blend wrote:
Tycoon wrote:
mlebuf wrote:
House Blend wrote: +1. I have no use for net worth.
If anyone has no use for their net worth, I'll be happy to receive it. :sharebeer
That makes two of us.
Did I forget to mention that my net worth is negative? ;-)
I want to see this transfer of wealth ;-)
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Re: Net worth is overrated

Post by TheTimeLord »

an_asker wrote:I get it that it is nice to look at one's net worth and be happy when you turn over the number of commas, i.e., go from zero to one to two and so on. However, we/I tend to pay much more importance to net worth than we/I should be. I got this brainwave only over this weekend that net worth is really over-rated though, obviously, we all realize that net worth is not all there is to retirement planning.

For sure, whenever folks ask about retirement plans, the respondents ask about complete details to determine whether the asker can or cannot retire right now. However, during any phase of the working career, we tend to still focus on net worth (or at least, I do), and we probably are giving undue weightage to it. Here is why I don't think we should really be paying as much attention as we currently do to this figure:

- higher net worth is only better if it is with the same expectation of spending: this is a no-brainer. If person A has higher expectations of spending than person B does, A had better have a higher net worth than B to compensate for the higher spending expectation to get the same amount of happiness in upon retirement.

- net worth does not include inheritance: another no-brainer. If you are expecting a six (or even seven!) figure inheritance, you would not be including it in your net worth. But your net worth does not need to be anywhere close to someone else, even if you have the same exact expectation of spending. For the very reason that you are going to be taken care of when you retire!!

- a comparison of net worth is not really an apples to apples comparison: this goes across a) age as well as b) proportion of taxable vs. tax-deferred accounts! Ironically enough, in this case, the "tax deferred" accounts are actually to your disadvantage! In other words, a taxable account, say $500k, is much better than a "tax deferred" account. Why? Because on the former, you've been paying taxes as you go, whereas on the latter, you will still be owing taxes. Not everyone discounts the tax deferred accounts in his/her net worth - and how can he/she, when the actual taxes are still fuzzy? Same thing goes with the age comparison - someone who is older is pretty much set with the current tax rates, whereas they are a much bigger wildcard/unknown to someone who is younger.

- net worth does not include anticipated medical expenses: if A's medical history indicates that you will need more medical care than B, then A had better have a much higher net worth to compensate for these expenses. Another side of the same coin is that if B has a much better medical insurance provided by his/her employer (veteran/government employee, megacorp, etc), he/she can expect lesser expenses during retirement even if A and B are on the same track with respect to current and anticipated medical needs.

- net worth does not include pension. This is another biggie. Folks never (or very rarely) include pension in the net worth. But a pension is a secure source of income in retirement, and definitely should (and is) considered when figuring whether it is a good time to retire or not. However, when looking at net worth, it is rare to include a pension in it.

Bottom line: Just because one's net worth has a comma, or two, or three, does not really mean that one is better off than someone else who has (comparatively speaking) a net worth with zero, one or two commas. And vice versa, of course :-)
I think you miss the point, Net Worth is a personal accounting of your assets for you, not a scorecard so you can compare yourself to others.
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Re: Net worth is overrated

Post by Good Listener »

With all due respect, I do not know what prompted you to send this but I assume something involving yourself. I defy you to show me how somebody with 10 million dollars net worth can be in a worse position than somebody with nothing.
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Re: Net worth is overrated

Post by SGM »

I am more interested in how much income I can generate in retirement and what my projected expenses are than in net worth. My net worth is increased by real estate, but the real estate requires paying certain expenses and taxes and generates some income too. I don't use net worth in my calculations. I am "pensionizing" some of my portfolio by delaying SS until 70. I may also add SPIAs later on which is also "pensionizing" some of the portfolio.
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Re: Net worth is overrated

Post by NotWhoYouThink »

Straw man. Overrated by whom? I haven't seen anyone on this board claim that there is any generally accepted way to calculate net worth, or that it tells anyone all they need to know.
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Re: Net worth is overrated

Post by badbreath »

I have to agree that net worth is worthless information. I need a house, have a pension but do not have the money, have a inheritance coming but do not have it now. I only look at what I have now and see how I can get it into my asset allocation.
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Re: Net worth is overrated

Post by knpstr »

Good Listener wrote:With all due respect, I do not know what prompted you to send this but I assume something involving yourself. I defy you to show me how somebody with 10 million dollars net worth can be in a worse position than somebody with nothing.
I wouldn't say NW is overrated nor meaningless, but to simply answer your challenge:

The one with $10 million is terminally ill/crippled/bed ridden and will die in a week with no friends/relationships.
The person with nothing is in great health, with great friends/relationships.
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LarryAllen
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Re: Net worth is overrated

Post by LarryAllen »

One way net worth is not overrated is that I sleep much better with my current net worth than my 10-15 years ago net worth.
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SmileyFace
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Re: Net worth is overrated

Post by SmileyFace »

After 3+ years of avid reading here on Bogleheads I don't believe net worth is overrated herein. There are far many more discussions around AA, EF, RMDs, calculating/tracking expenses, and so on.
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rob
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Re: Net worth is overrated

Post by rob »

SGM wrote:I am more interested in how much income I can generate in retirement and what my projected expenses are than in net worth.
This is it for me... I don't care about the traditional version of "net worth" (never calc that one) but I care about investment accumulation set aside for retirement goals (subset of investment balance since I have other goals) - in the sense it's x years of living at y lifestyle. That one I calc now and then and compare against wildly estimated retirement expenses.

Speaking of which... I have to wonder if part-time jobs that pay ZERO but include Health benefits are going to become a thing in the future... That's the biggie that I cannot get my arms around :oops:
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JDCarpenter
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Re: Net worth is overrated

Post by JDCarpenter »

Good Listener wrote:With all due respect, I do not know what prompted you to send this but I assume something involving yourself. I defy you to show me how somebody with 10 million dollars net worth can be in a worse position than somebody with nothing.
10 million is an 80 year old with terminal cancer.

Zero is 2d year Wachtell Lipton associate who just paid off last of Yale law school debt--and is engaged to be married to a Cleary or Skadden lawyer with no debt.... Other examples are out there....
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letsgobobby
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Re: Net worth is overrated

Post by letsgobobby »

nisiprius wrote: Every specific financial planning purpose would require some other dollar number computed in some other way than "net worth."
When you die, the IRS and your state tax agency care very much about your net worth. If you don't believe it, try dying with more than $5.5 million (individual) and telling the IRS you don't think net worth is important for any purpose.
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Re: Net worth is overrated

Post by basspond »

A bird in hand will always be better then two in the bush. There are a lot of what ifs. To me it is the percentage your portfolio has to generate to cover your expenses.
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Re: Net worth is overrated

Post by sesq »

A lot of items in the OP's post can be estimated pretty reasonably and I think there are a number of posters who fear the estimate. For example if you have a pension that can be either quantified as a NPV or used to reduce future income needs when trying to determine when you hit enough. Similar, it isn't hard to compute deferred taxes on tax preference accounts and I track a liability in my net worth and asset allocation computations.

Where I agree with the OP is on the ones that are harder to estimate because of increased uncertainty. Most notably health care and age. I have a decent net worth as a 45 year old, but I feel compelled to save more because I have a lot of responsibilities to my wife and children and we have a lot of living left to do and you never know when something major could come down the pike.
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