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If you regularly read personal finance weblogs, then you know that writing about one’s “net worth” is a fairly popular topic. While I understand the importance of metrics for tracking your progress, I have to admit that I’ve never been a big fan of net worth in its purest form… That is, how much money you’d have if you liquidated all of your investment accounts, withdrew all of your funds from the bank, sold everything that you own that has any value whatsoever, paid off all your debts, and then threw the remainder in a giant pile.
The main reason for my aversion to net worth calculations is that I’m most interested in charting a course to financial independence and, in my view, financial independence doesn’t involve selling our house or getting rid of our cars. True financial independence involves amassing enough wealth that you’re able to live of your investment income with no additional input. So I’ve always calculated net worth with a major caveat — that I’m ignoring our personal possessions, including our house (and the associated mortgage).
Well, yesterday afternoon it hit me… What I’m really talking about is net investable assets, as opposed to net worth — basically the sum of your cash and investments (including real estate investments, but not including your primary residence). You know, the sort of stuff that (at least potentially) generates income, and could thus serve as the basis for financial independence. Yes, I realize that you could sell your house and downsize, thereby generating additional wealth, but I’m going to ignore that possibility because that’s not part of our grand plan.
What about debt? The only thing that we owe money on is our house, and I tend to think of our mortgage payment (plus our additional principal prepayment) as part of our cost of living. After all, if we didn’t have a house payment right now, we’d have to pay rent. Thus, I don’t feel compelled to include our mortgage in this calculation. If, on the other hand, we had boatloads of consumer debt, I’d probably deduct that. Of course, this could get sticky if you had something like a HELOC that you used to rid yourself of credit card debt — in this case, it’s technically a loan on your home, but it’s really nothing more than re-packaged consumer debt. Fortunately, this a complete non-issue in our case.
What’s the point of all of this? Well, more than anything, this has been kicking around in the back of my mind, and I figured putting pen to paper (so to speak) would help to solidify my thinking on this. Moreover, I’ve been thinking that it would be interesting to cull through our Quicken data (which goes back a decade) and chart our progress. I’m not talking about disclosing actual values, but I thought that it might be interesting to generate a timeline showing percentage increases/decreases on a yearly basis, and maybe tie that back to major life events. If this sounds like something you’d be interesting in seeing, then keep an eye out — I hope to pull something about this together soon.
So… What’s your view? Do you keep track of your net worth? Why or why not? Or perhaps you’re more in line with me, and you tend to focus more on the value of your investable assets as opposed to tallying up the whole ball of wax? Please don’t hesitate to leave a comment.
Oh, and if you’ve already published your thoughts on this elsewhere (or if you decide to go off and do so now), then please drop me a line using my contact form and I’ll add a link to your post.
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