“Homer: He might have all the money in the world, but there’s one thing he can’t buy.
Marge: What’s that?
Homer: A dinosaur.” -The Simpsons
I’ve always found the topic of net worth to be scary and frustrating, mostly because of the “worth” part in the term. It’s frightening to connect my knowledge and handling of money to any sort of measure of my worth as a person. If I were to base my worth solely on my assets, I probably wouldn’t feel too good about myself. I imagine that the shadowy meaning of “worth” is one of the many reasons why many people under 30 don’t want to look at their net worth.
Other reasons could be that 1) it seems impossible for any member of Generation Debt to cross over to positive net worth 2) the idea of calculating and then comparing net worth to that of others sounds like a recipe for depression or anxiety, and 3) the concept of net worth is obfuscated by so many differing perspectives from various personal finance resources that it can be extremely confusing.
Net worth is simply the value of your assets minus debts. Trent at The Simple Dollar walks you through the process quite nicely, and Teri Newton at Personal Finance Advice provides a more detailed and encompassing approach. Instead of echoing what others have said better, I’d like to make the subject of net worth more approachable with my personal example. I’ll explain what went wrong in cultivating my long-term financial goals, and how all of that will change as I venture into this next phase of the Almost Debt Free series: Building Wealth. My goal is to convince you that confronting your net worth isn’t like a death wish for your ego. It’s actually an opportunity to make life better.
A Wrong Start
When I was growing up, there was never any discussion of net worth. I was raised with the mentality that if I go to college and get good grades, something good will happen. That “something good” was rather ambiguous, and exactly “how it will happen” was even more elusive. I essentially got lots of mixed messages from my parents that I wouldn’t have to rely on myself entirely for money, though it never really worked out that way. I ended up having to completely earn my own way instead of cashing in on the family business that started going downhill in the last few years.
It’s my own fault for believing that money comes easy. A number of people I’ve encountered have actually sat me down and said, “Please don’t make the mistakes I made. Find some way to depend on yourself. The only person you can rely on for money is yourself.”
Moving forward, the best advice I could give to anyone looking to build wealth is to repeat the same admonition given to me. Often the aspect of self-reliance is missing from the discussion of wealth building, and I’m not sure why. Perhaps it’s an obvious point for some, but if it were so obvious, why is it that 50% of the workforce (across all ages) has less than $25,000 in retirement savings, or that four in ten workers are living paycheck to paycheck? If you’re clinging to the hope someone is going to save you from your finances, you could be setting yourself up for major disappointment.
A New Start
Let me make something clear about net worth, because it desperately needs clarification. According to Laura Bruce at Bankrate.com, “Net worth statements are like cheesecake; different everywhere you go. Some are too simple and too broad, while others may be so detailed that you’re not likely to complete it.”
There are many different approaches to calculating net worth, but one fact remains the same. You need to monitor and build your net worth if you want to be able to retire and perhaps accomplish loftier financial goals, like leaving behind an inheritance. At the very least, you should know your net worth to have a sense of your financial health in the present and see how far you are from maintaining your current lifestyle in retirement.
It’s hard to think about retirement when 65 seems so far away, but wouldn’t it suck to realize that you’re getting too old and tired to work anymore? And then suddenly you see, wow, you have no way to provide for yourself, or that worse yet, you’re still in debt at 65.
Retirement isn’t a sexy topic, but here’s a twist to make it appealing. Imagine never having to work again because you are independently wealthy. You have now earned more than enough money that you can sit at the beach everyday, sipping on margaritas in the shade as the hotties walk by. Some of us spend a substantial amount of money just to be able to do this two weeks out of the year. Imagine that by cutting back on your lifestyle now and making your money grow, you can someday have this life of leisure all the time.
I’m one of those people who over-subscribed to the philosophy that one should enjoy youth to the fullest. I compare my lifestyle now to my wilder days before I gained financial literacy, and I see that having fun and being financially responsible are not mutually exclusive, although it can be without finding the right balance.
There’s something more satisfying about partying in moderation and making progress on financial goals than there is chasing instant gratification on a day-to-day basis. Often, that’s a lesson learned only through personal experience. So I ask, why not try making changes today?
Now you know why you should be paying attention to your net worth. Stay tuned for next week when I’ll cover how to increase your net worth.