Author Topic: Is net worth a stupid calculation?  (Read 10422 times)

Slee_stack

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Re: Is net worth a stupid calculation?
« Reply #50 on: June 12, 2016, 07:48:02 AM »


You say your net worth is what you could apply the 4% rule to.  But it's not.  Your *liquid* net worth is what you apply the 4% to.  But the treasured pearls and the sofa and the home you plan to live in can't be used to create 4% annually.

It is useful to know where you *would* stand *if* you sold the house, the pearls, etc. Exactly for downsizing, or just moving elsewhere. Things happen, and I think it makes more sense to have a complete picture than ignoring assets just because they are a static factor in your current plan or have some aversion to ever selling them.

I can't tell if some genuinely have blinders on and can't see alternative scenarios.

Real Estate (including your home) is an asset.  So is a car.  So is a collectible baseball card.  So is a stockpile of gold bullion.  So are stock certificates.  So is cash under the mattress.  It is all the same.  4% rule or not.  You can sell any or all of them.  You can rent or pay property taxes wherever you want.

If the value of your personal property is $10k or $1000000, you better keep track or you might wake up one day and say 'Crap!  I could have retired 10-20 years ago if only I knew some sucker would have paid so much for my house and I just moved!'

So if you sold your house for $1M and moved to a nice house elsewhere for $200k, you now have $800k extra that you never accounted for.  That would have been pretty damn foolish to ignore all those years because...you know...Net Worth is MEANINGLESS!




Lmoot

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Re: Is net worth a stupid calculation?
« Reply #51 on: June 12, 2016, 10:32:28 AM »


You say your net worth is what you could apply the 4% rule to.  But it's not.  Your *liquid* net worth is what you apply the 4% to.  But the treasured pearls and the sofa and the home you plan to live in can't be used to create 4% annually.

It is useful to know where you *would* stand *if* you sold the house, the pearls, etc. Exactly for downsizing, or just moving elsewhere. Things happen, and I think it makes more sense to have a complete picture than ignoring assets just because they are a static factor in your current plan or have some aversion to ever selling them.

I can't tell if some genuinely have blinders on and can't see alternative scenarios.

Real Estate (including your home) is an asset.  So is a car.  So is a collectible baseball card.  So is a stockpile of gold bullion.  So are stock certificates.  So is cash under the mattress.  It is all the same.  4% rule or not.  You can sell any or all of them.  You can rent or pay property taxes wherever you want.

If the value of your personal property is $10k or $1000000, you better keep track or you might wake up one day and say 'Crap!  I could have retired 10-20 years ago if only I knew some sucker would have paid so much for my house and I just moved!'

So if you sold your house for $1M and moved to a nice house elsewhere for $200k, you now have $800k extra that you never accounted for.  That would have been pretty damn foolish to ignore all those years because...you know...Net Worth is MEANINGLESS!i
And the value of assets you can or are willing to sell can determine whether or not you even follow the 4% rule. Real estate investors are a great example of someone who could be networthy but liquid poor. As someone who plans to eventually have 50% or more of my wealth in real estate, and the goal to earn more I in passive income and less from dividends, I don't care as much about how much I can withdraw as I plan on my investments to be supplemental income only, not the only or even main source of income when I stop working.

Classical_Liberal

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Re: Is net worth a stupid calculation?
« Reply #52 on: June 12, 2016, 11:01:45 AM »
Net worth is useful because of its ability to create cash flow. But yes, some net worths can create better cash flow for the same net worth, which is what people are arguing about here. A pension might have a $0 impact on net worth (if it is not commutable) but produce $100k/year income. Same with rental houses.

I think this is the most appropriate response to net worth.  Cash flow is obviously the most important in determining FI.  A well leverage real estate investor could create enough cash flow on say 250K invested to support a 40K annual spending lifestyle.  Is he/she more or less FI than someone invested in paper assets with 1 million net worth?  One could argue the real estate investor is less diversified, but someone retiring with 1 million all in VTSAX with a high CAPE has some risk as well.

Analogy time!
Net worth should be looked at like BMI in health.  In a large statistical pool a BMI over 25 is overweight, but if one lifts weights a BMI of 30 (obese) might be completely healthy.  So BMI (net worth) is a good general gauge of health for large numbers of people.  However, each person's individual circumstances; body type, sex, body fat %(type of investments, spending flexibility, leverage, cash flows) has a huge impact on what is realistically a healthy BMI for each individual circumstance.

Goldielocks

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Re: Is net worth a stupid calculation?
« Reply #53 on: June 12, 2016, 12:13:27 PM »
Ultimately, cash flow is what matters. Net worth in itself isn't important.

I disagree...

When you think where NW was originally based on -- it is like your Asset vs Liability statement for a business.  A business with a high "net worth" is one that is most likely to be able to leverage those assets to increase cash flow or to pay of liabilities.

Net worth can also be leveraged by the individual or used to generate income, improve loan rates, etc.


Cash flow is king, until you start to build a strong NW, then use the NW to generate cash flow.

THERE IS NO POINT ASSIGNING NW asset values to property you won't sell.  e.g., ART COLLECTION, FAMILY HOME, etc.
But most of us would sell or leverage our property at some point, so include our homes.

catccc

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Re: Is net worth a stupid calculation?
« Reply #54 on: June 13, 2016, 09:46:53 AM »
Net worth, being a simple snapshot of your assets-minus-liabilities at a given point in time has limited usefulness.

However, if you can take many snapshots and monitor the trend that your net worth takes over time, it will definitely tell you a lot about how you are doing financially.

This.  Tracking my net worth over the years has allowed me to see my progress towards FI.  (I am also a renter, so there is no gray area for me in terms of whether or not primary residence should be part of this.)

BTDretire

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Re: Is net worth a stupid calculation?
« Reply #55 on: June 13, 2016, 03:52:50 PM »
The MMM idea is to live off your assets.
So, for the MMM idea, we want to know,
How much income do we need to live.
What assets do we have that produce income.
We can call those "Income Producing Assets" (IPA)

Your Networth, that's what your heirs could consider,
their "Income Producing Assets"

So, anyone that wants to, can argue about Networth
vs "Income Producing Assets"

You might say, I have an IPA of $1.0M and a Networth of $1.5M,
I would say just tell me about your IPA, your heirs want to what is your networth.

Is networth a stupid calculation, nah, but IPA gives you useable information.

That's my 2 cents, (not included in my IPA)

Lmoot

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Re: Is net worth a stupid calculation?
« Reply #56 on: June 13, 2016, 05:12:59 PM »
^ Your assets can produce income. Just because it may be a one-off it can still provide enough value to produce an income directly, or to be reinvested in something that will produce income. Your willingness/goals to sell those assets will affect how much "IPA" you need so it is pretty damn useful to you in life as well. Maybe not for those who plan to subsist solely on dividends...but that's not everybody. So maybe the better thing to say would be "Networth is not useful for me and my goals for FIRE". As someone who plans on receiving as much, if not more income from real estate than dividends, you better believe I'm watching the value of my assets. Not just the value of the rental income, but the total value of the properties when/if I decide to cash in my chips.

BTDretire

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Re: Is net worth a stupid calculation?
« Reply #57 on: June 13, 2016, 08:32:39 PM »
^ Your assets can produce income. Just because it may be a one-off it can still provide enough value to produce an income directly, or to be reinvested in something that will produce income. Your willingness/goals to sell those assets will affect how much "IPA" you need so it is pretty damn useful to you in life as well. Maybe not for those who plan to subsist solely on dividends...but that's not everybody. So maybe the better thing to say would be "Networth is not useful for me and my goals for FIRE". As someone who plans on receiving as much, if not more income from real estate than dividends, you better believe I'm watching the value of my assets. Not just the value of the rental income, but the total value of the properties when/if I decide to cash in my chips.
I think all you are talking about is the home you live in.
If you plan on selling your home and down grading or renting,
then you can figure at least part of the home equity as an asset.
 I plan on living in my home, I don't expect it to generate income.

It is obvious to me that any other real estate you own is an asset
that could/should produce income.

 I have a property I sold on a land contract, now it generates income,
at payoff, I will need to reinvest those assets in another way to generate income.

The land contract property is part of my IPA, my home is not.

 If you want to sell your home and the cash you receive will generate more income
than the cost of renting, then you can count the difference as an IPA.