Net worth is overrated

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daveydoo
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Re: Net worth is overrated

Post by daveydoo » Tue May 23, 2017 1:16 am

NotWhoYouThink wrote: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.
Agreed. This is the same as saying "money is overrated." Higher net worth is just more money, right? Overrated for what, and by whom? There's a reason people say "It's like money in the bank."

We each think we fall right on the sweet spot of the frugality-to-profligacy spectrum -- but that's just opinion. (See: BH car threads, but only if you have a strong stomach).
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carolinaman
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Re: Net worth is overrated

Post by carolinaman » Tue May 23, 2017 6:38 am

Net worth is a useful document that essentially states your present net worth. Also, as the OP states, there is a lot of variability in what people put in a net worth statement which makes it difficult to compare with others. It seems it is used more on this site for bragging rights.

ljb1234
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Re: Net worth is overrated

Post by ljb1234 » Tue May 23, 2017 6:49 am

knpstr wrote:
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.
:beer
Net worth is certainly important, but your health is more valuable.
Just ask Steve Jobs how many billions he would have traded for good health?

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TheTimeLord
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Re: Net worth is overrated

Post by TheTimeLord » Tue May 23, 2017 7:46 am

carolinaman wrote:Net worth is a useful document that essentially states your present net worth. Also, as the OP states, there is a lot of variability in what people put in a net worth statement which makes it difficult to compare with others. It seems it is used more on this site for bragging rights.
For some or a comparison of how you are doing against your peers but it is a personal measurement helping you to understand the value of you financial assets when accounting for debt. Personally, I started tracking my NW in 2010 and it found it very valuable and motivating. On a similar vein you hear many arguments here for excluding home equity from you NW or that home equity is irrelevant but in my financial plan my Home Equity is part of the financing of my LTC as we would sell our home and transition to assisted living and use the proceeds from the sale of the home to help pay for our care. Seems pretty integral to financial plan to me. For those few who have good pensions or will receive a large inheritance, good for them but the majority of people don't and won't. NW is a tool and a valuable one at that.
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TheTimeLord
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Re: Net worth is overrated

Post by TheTimeLord » Tue May 23, 2017 7:51 am

ljb1234 wrote:
knpstr wrote:
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.
:beer
Net worth is certainly important, but your health is more valuable.
Just ask Steve Jobs how many billions he would have traded for good health?[
/quote]

To me it is apples and oranges to compare net worth and health, or finances and health. But if you don't then let's ask the question this way, would you rather have a 25 year retirement doing all the things you ever wanted to do and helping out your family and friends or a 40 year retirement living off Social Security only sitting in a rundown house. For some I imagine quality of life will be more important than quantity of life. Also, my guess is sick with a high net worth beats sick and on Medicaid any day.
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SQRT
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Re: Net worth is overrated

Post by SQRT » Tue May 23, 2017 8:11 am

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. 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.
Exactly. Cash flow is much more important than net worth, at least in retirement. But I agree with others who said "overrated by who?" And "who cares". This stuff seems blatantly obvious to me but maybe others are spending a lot of time "pondering" it?

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Re: Net worth is overrated

Post by SQRT » Tue May 23, 2017 8:16 am

daveydoo wrote:
We each think we fall right on the sweet spot of the frugality-to-profligacy spectrum -- but that's just opinion.
Exactly. By extension we think everyone that spends more than us is wasting money and extravagant. Anyone that spends less is a miser. For most people, they simply spend what they think they can afford and get comfortable with this. To think otherwise just raises the spectre of unhappiness and envy.

BW1985
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Re: Net worth is overrated

Post by BW1985 » Tue May 23, 2017 9:00 am

TheTimeLord wrote:
carolinaman wrote:Net worth is a useful document that essentially states your present net worth. Also, as the OP states, there is a lot of variability in what people put in a net worth statement which makes it difficult to compare with others. It seems it is used more on this site for bragging rights.
For some or a comparison of how you are doing against your peers but it is a personal measurement helping you to understand the value of you financial assets when accounting for debt. Personally, I started tracking my NW in 2010 and it found it very valuable and motivating. On a similar vein you hear many arguments here for excluding home equity from you NW or that home equity is irrelevant but in my financial plan my Home Equity is part of the financing of my LTC as we would sell our home and transition to assisted living and use the proceeds from the sale of the home to help pay for our care. Seems pretty integral to financial plan to me. For those few who have good pensions or will receive a large inheritance, good for them but the majority of people don't and won't. NW is a tool and a valuable one at that.
I never understand when people say my net worth is X but that doesn't include Y assets. No, that's not your net worth. Net worth is all assets - all liabilities. If you only consider your 401k/IRA's/ect. then call it your investable assets because that's what it is. Just a pet peeve I guess.
"Squirrels figured out how to save eons ago. They buried acorns. Some, they dug up, for food. Others, they let to sprout, in new oak trees. We could learn from squirrels." -john94549

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Re: Net worth is overrated

Post by bloom2708 » Tue May 23, 2017 9:18 am

BW1985 wrote: I never understand when people say my net worth is X but that doesn't include Y assets. No, that's not your net worth. Net worth is all assets - all liabilities. If you only consider your 401k/IRA's/ect. then call it your investable assets because that's what it is. Just a pet peeve I guess.
+1 "My net worth is $X, but I don't count our house or cars in our net worth". Well, then it isn't your net worth. :annoyed
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midareff
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Re: Net worth is overrated

Post by midareff » Tue May 23, 2017 9:33 am

Net worth is over rated when it isn't your net worth.

Jack FFR1846
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Re: Net worth is overrated

Post by Jack FFR1846 » Tue May 23, 2017 9:44 am

bloom2708 wrote:
BW1985 wrote: I never understand when people say my net worth is X but that doesn't include Y assets. No, that's not your net worth. Net worth is all assets - all liabilities. If you only consider your 401k/IRA's/ect. then call it your investable assets because that's what it is. Just a pet peeve I guess.
+1 "My net worth is $X, but I don't count our house or cars in our net worth". Well, then it isn't your net worth. :annoyed
You mean like "My net worth is $6M, but that doesn't include the $6.1M mortgage, the $40k car loans or $350k in student loans. But it does include the house value and car value.

What?

I'm not sure on house value being usable for anything. If you have a $1M house in the bay area and plan to live in it forever, it doesn't really count as something you can convert into spendable cash. If you plan to sell the house, buy a $35k house in Huntington, Indiana and use the cash to live off of, then ok, I agree that it is a usable number.
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greg24
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Re: Net worth is overrated

Post by greg24 » Tue May 23, 2017 9:46 am

imperfect != overrated

bloom2708
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Re: Net worth is overrated

Post by bloom2708 » Tue May 23, 2017 10:15 am

Jack FFR1846 wrote: You mean like "My net worth is $6M, but that doesn't include the $6.1M mortgage, the $40k car loans or $350k in student loans. But it does include the house value and car value.

What?

I'm not sure on house value being usable for anything. If you have a $1M house in the bay area and plan to live in it forever, it doesn't really count as something you can convert into spendable cash. If you plan to sell the house, buy a $35k house in Huntington, Indiana and use the cash to live off of, then ok, I agree that it is a usable number.
I was using statements I see frequently here about how net worth is calculated.

You did it in your post too. "If you have a $1M house in the bay area and plan to live in it forever, it doesn't really count as something you can convert into spendable cash."

Wrong. You can sell the home (pay off the mortgage, if any) at any time and have $X after fees/taxes.

My point was, what good is net worth if you don't take "what you own" less "what you owe"? Now, you can't (well, you could) go down to counting knifes/forks/spoons/socks/shoes, but your personal property is worth something. You can have a garage sale, estate sale, auction sale and you end up with something.
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WL2034
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Re: Net worth is overrated

Post by WL2034 » Tue May 23, 2017 10:28 am

Is the importance of expenses/expenditures over-rated? After all, if your expenses are high, you can just make more money. Perhaps that's more easily said than done.

Conversely, how is net worth overrated? It's just a part of one's financial picture. I would say that most Bogleheads understand that quite thoroughly. Therefore, I believe that net worth is neither over-rated nor under-rated. It is properly rated.

miamivice
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Re: Net worth is overrated

Post by miamivice » Tue May 23, 2017 10:35 am

Assets that will never be disposed of are still assets. However, they're not useful assets.

So, I figure them as part of my net worth but not part of my usable net worth.

BW1985
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Re: Net worth is overrated

Post by BW1985 » Tue May 23, 2017 11:00 am

Jack FFR1846 wrote:
bloom2708 wrote:
BW1985 wrote: I never understand when people say my net worth is X but that doesn't include Y assets. No, that's not your net worth. Net worth is all assets - all liabilities. If you only consider your 401k/IRA's/ect. then call it your investable assets because that's what it is. Just a pet peeve I guess.
+1 "My net worth is $X, but I don't count our house or cars in our net worth". Well, then it isn't your net worth. :annoyed
You mean like "My net worth is $6M, but that doesn't include the $6.1M mortgage, the $40k car loans or $350k in student loans. But it does include the house value and car value.

What?

I'm not sure on house value being usable for anything. If you have a $1M house in the bay area and plan to live in it forever, it doesn't really count as something you can convert into spendable cash. If you plan to sell the house, buy a $35k house in Huntington, Indiana and use the cash to live off of, then ok, I agree that it is a usable number.
Any asset is 'usable' and all assets are included in networth. You seem to be referring to liquidity - yes cash, bonds, index funds, etc are more liquid than a house but they don't count for anything more or less in networth than what they are. If you have equity in your house then your home adds to your networth, if you're under water than it reduces your networth. To ignore your home value/mortgage results in a number that is not your net worth. That is also true for any other asset or liability. That's all.

If you own a $1M house and no mortgage it's still an asset whether you choose to live there the rest of your life or not. It represents $1M (minus selling costs) of your net worth.
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MrNewEngland
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Re: Net worth is overrated

Post by MrNewEngland » Tue May 23, 2017 11:22 am

I don't think it's overrated, it's an extremely helpful tool when dealing with personal finance. With that said not all net worths are created equally.

Let's look at two people that each have a NW of $2.5M (random number) at retirement age. Let's assume both have their houses paid off.

Person A lives in a $2 M house and has $500K in retirement accounts.

Person B lives in a $500K house and has $2 M in retirement accounts.

Using the 4% rule person A will have to live on $20,000 annually with (I assume) higher property taxes and maintenance costs. Person B will live on $80,000/ year.

Admiral
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Re: Net worth is overrated

Post by Admiral » Tue May 23, 2017 11:39 am

How this thread has not been locked by now is beyond me...

If you don't think an asset that you never plan to sell (i.e. a "non-usable asset") should be part of your net worth calculation, your heirs are going to have a big surprise when the IRS comes knocking...

An asset is an asset. What you do with it is your business, but it still has intrinsic value.

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TheTimeLord
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Re: Net worth is overrated

Post by TheTimeLord » Tue May 23, 2017 11:46 am

Jack FFR1846 wrote: I'm not sure on house value being usable for anything. If you have a $1M house in the bay area and plan to live in it forever, it doesn't really count as something you can convert into spendable cash.
HELOC or Reverse Mortgage? Plus just because you plan to live there forever doesn't mean you can or will whether it is moving into long term care or moving close to the grandkids that Bay Area house would be great to monetize.
Last edited by TheTimeLord on Tue May 23, 2017 12:00 pm, edited 1 time in total.
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Re: Net worth is overrated

Post by Kenkat » Tue May 23, 2017 11:53 am

I don't understand the statement that it is income that matters, not net worth. Your net worth is a large factor in how much income you can generate. Not all assets generate income - for example you home - but they can be converted to assets that can generate an income, and many other assets DO generate income, so net worth seems pretty important to me unless you will be fully funded by pension and social security income when you retire.

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bligh
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Re: Net worth is overrated

Post by bligh » Tue May 23, 2017 11:58 am

TheTimeLord wrote:
Jack FFR1846 wrote: I'm not sure on house value being usable for anything. If you have a $1M house in the bay area and plan to live in it forever, it doesn't really count as something you can convert into spendable cash.
HELOC or Reverse Mortgage? Plus just because you plan to live there forever doesn't mean you can or will whether it is moving into long term care or moving close to the grandkids that Bay Area house would be a great to monetize.
+1

Its not like someone is going to starve and live with their utilities cut off in their $1 million house. They will sell, cash out and rent a place outside the city.

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sunny_socal
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Re: Net worth is overrated

Post by sunny_socal » Wed May 24, 2017 8:15 am

Maybe thread should be called "Net worth is misunderstood." It's not cash flow. It's ALL assets and ALL liabilities. Period.

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Re: Net worth is overrated

Post by ryman554 » Wed May 24, 2017 8:30 am

Kenkat wrote:I don't understand the statement that it is income that matters, not net worth. Your net worth is a large factor in how much income you can generate. Not all assets generate income - for example you home - but they can be converted to assets that can generate an income, and many other assets DO generate income, so net worth seems pretty important to me unless you will be fully funded by pension and social security income when you retire.
Because people are answering two different questions.

1. Net worth is a statistic. With a well-defined way to compute. And extremely useful to the working class to determine how close they are to Financial Independence.
2. Cash flow is another statistic. With a somewhat less, but still well-defined way to compute / track. And extremely useful to the working AND retired class to make sure they can put food on table, and for those with a mortgage, a place to sleep.

A high net worth individual can almost always convert the net worth into a higher sustainable cash flow versus a lower net worth individual, but not necessarily the next day (indeed, or even the next month), so is less relevant to the retirees or soon-to-be retirees. A high cash flow does not necessarily equate to a large net worth, depending on discretionary expenses.

So, it really depends on the point of view of the respondent: do they care about the ability to have financial independence or are they focused on simply putting food on the table next month?

BW1985
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Re: Net worth is overrated

Post by BW1985 » Wed May 24, 2017 9:01 am

sunny_socal wrote:Maybe thread should be called "Net worth is misunderstood." It's not cash flow. It's ALL assets and ALL liabilities. Period.
:thumbsup
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Re: Net worth is overrated

Post by finite_difference » Wed May 24, 2017 2:18 pm

BW1985 wrote:
sunny_socal wrote:Maybe thread should be called "Net worth is misunderstood." It's not cash flow. It's ALL assets and ALL liabilities. Period.
:thumbsup
:sharebeer
I agree in theory but the devil is in the details. There's a bit of gray area in how you value assets and liabilities.

For example, how do you place a value on a pension? Which may or may not go under? How do you value SS? Or a Trad 401k/IRA vs Roth?
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bantam222
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Re: Net worth is overrated

Post by bantam222 » Wed May 24, 2017 3:19 pm

These are all variables that work into the equation of life:
net worth
health
pension
health
inheritance
Social Security
age
...

you could even expand this into other areas that are harder to measure such as:
education / intelligence
your appearance (tall / short - fat / fit)
family
experiences
...

Each component would get a different weight in the 'equation of life', since these categories all have different levels of importance. The tricky part here is not every would agree on what is most important (some people would value age/health over month, some people would rather have family than be rich).

You need the value of all these variables to be able to calculate how someone is 'winning at life' and compare against others (if that is your intention). Looking at just one of these variables is "overrated". We can't just focus on one category if we want to compare with others.

However, with that said, net worth is generally one of the biggest weighted variables in this formula, so not a bad one to measure and pay close attention to.

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Re: Net worth is overrated

Post by LadyGeek » Wed May 24, 2017 3:41 pm

This thread has run its course and is locked (topic exhausted, not actionable). See: Locked Topics
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