Is net worth a stupid calculation?

[Vagabond76]

I just totaled my household balances for the year and calculated that our NW increased by an substantial (in my opinion) amount since January.  At what point does this get ridiculous?  I have all my accounts set to reinvest and make monthly contributions, such that my savings rate is about $10k/month.  The rest of the increase I guess is due to price appreciation.  Of course, the NW could fall by just as much or more in the second half of the year.

All this make me wonder what is the use of net worth.  If I applied for a loan the lender would want to know my ability to repay it, but banks are usually only interested in income and credit history.  It seems stupid to me to take out a loan and turn around and sell assets to pay it off.  Conversely, one's assets presumably generate income (dividends, interest, royalties, etc) to fund his or her lifestyle or supplement wages.

Where does that leave net worth?  Other than standing on top of a rock and announcing "my next worth is XX thousand/million/billion dollars," so what?

[bobechs]

I'd say try on a negative net worth for a while and see how that feels.  Then report back om how useless the concept is, for our edification.

[Dicey]

It's a benchmark, a goal, a yardstick. More importantly, I found it an excellent motivation tool. It allowed me to chart my improvement over a long period of time. You are right about some of it though. For example, when qualifying for a mortgage, the bank cares more about ability to pay, not the fact that you have more than the mortgage amount in cash in their bank. Not that I'm referencing recent personal experience or anything.

[Ursus Major]

You are right that the use of net worth might be limited, but there is still some use provided you follow some rules.

My personal rules were to not include the value of any depreciating asset (e.g. car) in my net worth calculation. I never had a condo or house, but if I had, I wouldn't have included that in my net worth calculation either. Alternatively - if you plan to sell your condo/house and move to a cheaper location, include it, but also subtract the price of your new condo/house, if you're buying again.

So for me my net worth only included my cash, investment and retirement accounts and with that it's helpful to assess how far along you are already to being FI. If your annual expenses are $60k and you plan on a 4% withdrawal rate, you need $1.5M from your investments. If you have other income (say from rentals), you only need the difference from your investments. As far as dividend income goes, I consider that part of the 4% withdrawal rate, so if your $1.5M investments throw off $30k in dividends (2% yield), you can still take out another 2% from the principal.

So the point of this (somewhat rambling) answer: I see the utility of "net worth" in withdrawal calculations, but only to the extent that it covers your cash, investment and retirement accounts. Some random "total net worth" calculation that includes the Ferrari in your garage is indeed of no value, but then that was never a problem for me.

[Vagabond76]

I'd say try on a negative net worth for a while and see how that feels.  Then report back om how useless the concept is, for our edification.

I started at zero but have never been negative. Negative means you went in debt to buy either things that went down in value (i.e. you overpaid) or bought an education (which never seems to be include in NW but should).

We all end at zero, don't we?

[Villanelle]

More and more, I am considering it to be of very little value.

One of the only ways I can see it mattering is if it's including an asset that I may convert to something liquid.  If my house has $500k in equity and I plan on downsizing to a house or location that costs $200k, that $300k in net worth is relevant, though given that prices can change, it's only somewhat so. 

I track stache amount only--liquid assets that we can use to generate our spending money.  That's basically only our retirement and investment accounts and cash.  Then I mentally factor in a likely pension amount, for the sake of figuring out how much that offsets necessary spending money.   I pay almost attention to new worth. Until recently, I was using the terms "net worth" and "stache"/retirement assets almost interchangeably, though I knew they weren't the same thing. 

[Paul der Krake]

It's just one of the many numbers at your disposal. It has blindspots. Life is complicated and there is no number that could even come close to offering a definitive answer as to how two households compare. It is popular because it is easy to calculate (once a formula is picked), and it's pretty cool seeing it change every month.

[2Birds1Stone]

Net worth is everything in terms of financial independance lol!

[undercover]

Ultimately, cash flow is what matters. Net worth in itself isn't important. If you're able to afford the things you want without working, no it doesn't matter whether you're worth $100k or $1M. If you have made an investment that somehow returns you $40k a year with $100k, that's the same as withdrawing 4% from a $1M stock portfolio. Who's richer? Who cares? It's all apples to oranges.

Knowing the value of your assets and making informed investment decisions based on that does matter, however, but is completely different than the concept of "net worth" in itself. But it's also not "stupid" to know your net worth when it comes to decision making.

[redcedar]

Its like learning to crawl before learning to walk and then looking back and saying crawling was unnecessary.

Evolution in understanding how money works has us moving from simple to more sophisticated tools. I don't believe that makes the simple tools useless since many of the sophisticated tools are just expansions on the simple tools. 

[Capsu78]

While I track its growth annually for "sport", if/when my net worth started dropping I will want to know why and look for some actionable ideas to slow it.

PS- I did not calculate NW  until after 2008, so a major market correction obviously will force me to watch the decline or just stop calcing NW.

[SwordGuy]

Net worth is a useful number that is often used stupidly.  There's your answer! :)

It is useful for knowing whether your overall financial health is improving or deteriorating.   By tracking it (and the sub-totals that make it up), you can tell where the problems are or where you are doing well.

It is not useful as an FI number, as in using it as the basis of the 4% SWR rule.  A lot of people coming onto these forums are very confused about this.

[HPstache]

I think it's useful because it's a number that includes all of your investments, not just stocks & bonds.

[boarder42]

if you leave your house out of networth and you know how much you spend when your spendingx25 <= your network you're done working its a 100% useful calculation and thats the basis of this entire forum.

[Slee_stack]

This thread feels like clickbait.

If people feel like using Liquid Net Worth or Stock Totals or whatever, have at it.

Real Estate is an investment that can appreciate so why wouldn't one include it?  Is it not convert-able to cash?  So I shouldn't count Investment Properties as assets?  Wait, what?!

Even most Residential Properties can be sold (and replaced with a cheaper one) resulting in some amount of 'value' or cash gained.  Is that cash less 'real'?

If the suggestion is to ignore debts and assets then good luck planning for an effective retirement date!

[HPstache]

if you leave your house out of networth and you know how much you spend when your spendingx25 <= your network you're done working its a 100% useful calculation and thats the basis of this entire forum.

A paid off house is worth at least as much as the rent it displaces X 25 then.  If rent would be $1000 in FIRE, then if you have a paid off house it must be worth the equivalent of $300,000 in an investment account ($12,000 * 25).

[Dicey]

We all end at zero, don't we?

Um, no. My heirs, friends and favorite charities will receive something well above zero when I end. If you meant that you can't take it with you,  I agree, but that's different. If my very own mother could not manage to take it with her, I am convinced it cannot be done.

[redcedar]

We all end at zero, don't we?

Um, no. My heirs, friends and favorite charities will receive something well above zero when I end. If you meant that you can't take it with you,  I agree, but that's different. If my very own mother could not manage to take it with her, I am convinced it cannot be done.

You could follow Egyptian kings and have it buried with you..... If you do, make sure not to share that here since someone would dub themselves an archeologist and do some tomb raiding.

[boarder42]

if you leave your house out of networth and you know how much you spend when your spendingx25 <= your network you're done working its a 100% useful calculation and thats the basis of this entire forum.

A paid off house is worth at least as much as the rent it displaces X 25 then.  If rent would be $1000 in FIRE, then if you have a paid off house it must be worth the equivalent of $300,000 in an investment account ($12,000 * 25).

you dont count your home in the equation when you own a home.  if you're renting yes but you expenses when calculated for FIRE should be what comes out of your bank account mortgage or no mortgage paid off or not.  you're just trying to do fancy math and you're not accomplishing anything. 

rent isnt an expense for a homeowner so its not counted.  your expenses shouldnt be calculated at what you spend now but at what you plan to spend when retired.  i almost didnt respond to this comment but there is a large gap in understanding here with what you wrote

[boarder42]

This thread feels like clickbait.

If people feel like using Liquid Net Worth or Stock Totals or whatever, have at it.

Real Estate is an investment that can appreciate so why wouldn't one include it?  Is it not convert-able to cash?  So I shouldn't count Investment Properties as assets?  Wait, what?!

Even most Residential Properties can be sold (and replaced with a cheaper one) resulting in some amount of 'value' or cash gained.  Is that cash less 'real'?

If the suggestion is to ignore debts and assets then good luck planning for an effective retirement date!

everyone is unique and depending on what your plan is with your primary residence once FIREd and how you use networth in figuring out when you can FIRE it is different but if you plan to keep it and you dont have a mortgage its not an expense and doesnt really help you calculate when you can FIRE. 

i feel like too many people here are overcomplicating such a basic thing ...

1. figure out how much you plan to spend in FIRE including a mortgage on your house rent etc. whatever you expect your total expenses to be
2. invest money either in index funds or property or whatever loopity doopity you want
3. when your investments are more than your expected retirement expenses x 25 you are FI and can RE when ever you want. 

[HPstache]

if you leave your house out of networth and you know how much you spend when your spendingx25 <= your network you're done working its a 100% useful calculation and thats the basis of this entire forum.

A paid off house is worth at least as much as the rent it displaces X 25 then.  If rent would be $1000 in FIRE, then if you have a paid off house it must be worth the equivalent of $300,000 in an investment account ($12,000 * 25).

you dont count your home in the equation when you own a home.  if you're renting yes but you expenses when calculated for FIRE should be what comes out of your bank account mortgage or no mortgage paid off or not.  you're just trying to do fancy math and you're not accomplishing anything. 

rent isnt an expense for a homeowner so its not counted.  your expenses shouldnt be calculated at what you spend now but at what you plan to spend when retired.  i almost didnt respond to this comment but there is a large gap in understanding here with what you wrote

I'm sorry, but I think you're the one who doesn't understand.  Or maybe we are on on a completely different wavelength because you seem like a pretty smart guy to not get what I'm saying.

[Lmoot]

if you leave your house out of networth and you know how much you spend when your spendingx25 <= your network you're done working its a 100% useful calculation and thats the basis of this entire forum.

A paid off house is worth at least as much as the rent it displaces X 25 then.  If rent would be $1000 in FIRE, then if you have a paid off house it must be worth the equivalent of $300,000 in an investment account ($12,000 * 25).

you dont count your home in the equation when you own a home.  if you're renting yes but you expenses when calculated for FIRE should be what comes out of your bank account mortgage or no mortgage paid off or not.  you're just trying to do fancy math and you're not accomplishing anything. 

rent isnt an expense for a homeowner so its not counted.  your expenses shouldnt be calculated at what you spend now but at what you plan to spend when retired.  i almost didnt respond to this comment but there is a large gap in understanding here with what you wrote

I disagree. Your house is still an asset. You borrow from it, put it up for collateral, sell it and collect. Including the value of your house in your networth calculation is not fancy useless math if you intend on selling it down the road. It's also useful if you keep it, in determining how much you want to leave your heirs balanced against how much of your cash you can spend to meet that goal. By including the house, you can up the amount of cash you're willing to live on, since you'll know the value of the non-cash assets. Hearing my dad and aunt discuss my grandmother's finances each time they meet with her beneficiary lawyer and believe me, they are very interested in the net worth including the value of the house which each of them own as part of a trust with their mom.

Just because you wouldn't use it doesn't make it useless. You just lack imagination :)

[frugaliknowit]

No, net worth is FAR from a stupid calculation.

If one is getting out of debt and or investing, it is a useful yardstick of progress.
Things to keep in mind:

1.  During a hot market, don't get overly enthused, because there will be bounces.
2.  During a bear market, don't get discouraged.  It's just the market:)

As for the basis for a loan, or showing it to banks:  Personally, when I did a refi 5 years ago, I purposely did not show any investment assets to the bank.  None of their business, and prefer they not know what I've got (in case things go very south).

[Vagabond76]

I disagree. Your house is still an asset. You borrow from it, put it up for collateral, sell it and collect. Including the value of your house in your networth calculation is not fancy useless math if you intend on selling it down the road. It's also useful if you keep it, in determining how much you want to leave your heirs balanced against how much of your cash you can spend to meet that goal. By including the house, you can up the amount of cash you're willing to live on, since you'll know the value of the non-cash assets. Hearing my dad and aunt discuss my grandmother's finances each time they meet with her beneficiary lawyer and believe me, they are very interested in the net worth including the value of the house which each of them own as part of a trust with their mom.

Just because you wouldn't use it doesn't make it useless. You just lack imagination :)

When you're dead other people have an interest in your net worth...the government wants to collect estate and inheritance taxes and heirs fight over every last scrap of bacon left on the plate.  Maybe this is an argument for getting paper investments out of street name and holding the physical certificates.  The government doesn't see them and you can sign the certificate over to whomever you want.

[boarder42]

if you leave your house out of networth and you know how much you spend when your spendingx25 <= your network you're done working its a 100% useful calculation and thats the basis of this entire forum.

A paid off house is worth at least as much as the rent it displaces X 25 then.  If rent would be $1000 in FIRE, then if you have a paid off house it must be worth the equivalent of $300,000 in an investment account ($12,000 * 25).

you dont count your home in the equation when you own a home.  if you're renting yes but you expenses when calculated for FIRE should be what comes out of your bank account mortgage or no mortgage paid off or not.  you're just trying to do fancy math and you're not accomplishing anything. 

rent isnt an expense for a homeowner so its not counted.  your expenses shouldnt be calculated at what you spend now but at what you plan to spend when retired.  i almost didnt respond to this comment but there is a large gap in understanding here with what you wrote

I disagree. Your house is still an asset. You borrow from it, put it up for collateral, sell it and collect. Including the value of your house in your networth calculation is not fancy useless math if you intend on selling it down the road. It's also useful if you keep it, in determining how much you want to leave your heirs balanced against how much of your cash you can spend to meet that goal. By including the house, you can up the amount of cash you're willing to live on, since you'll know the value of the non-cash assets. Hearing my dad and aunt discuss my grandmother's finances each time they meet with her beneficiary lawyer and believe me, they are very interested in the net worth including the value of the house which each of them own as part of a trust with their mom.

Just because you wouldn't use it doesn't make it useless. You just lack imagination :)

Its useless from a stance of calculating FIRE.  if i spend 50k a year i need an INVESTED networth that i can withdraw from of 1.25MM ... if i include my house in that at being worth 200k i dont now magically only need to have 1.05MM invested in VTSAX or the like.  i still need 1.25MM invested there.  you can include it or not include it but when calcing FIRE it doesnt matter as long as you do it correctly. so add it in then subtract it out to figure out when you can FIRE. you're being too imaginative and people will get confused ... the OP was is NW a stupid calc ... the answer is no its an essential calc to FIRE esp. when you remove your house.  if i spend 50k a year and have a NW of 1.25MM all tied up in a house i plan to live in NO I CAN F"N FIRE.  so when calcing FIRE NW you remove assets from the NW that you plan to keep in FIRE. 

Yeah when figuring out how to divvy up dead people's assets the house plays a role but in the realm of a FIRE forum and the question is NW stupid the answer is no

[Lmoot]

I disagree. Your house is still an asset. You borrow from it, put it up for collateral, sell it and collect. Including the value of your house in your networth calculation is not fancy useless math if you intend on selling it down the road. It's also useful if you keep it, in determining how much you want to leave your heirs balanced against how much of your cash you can spend to meet that goal. By including the house, you can up the amount of cash you're willing to live on, since you'll know the value of the non-cash assets. Hearing my dad and aunt discuss my grandmother's finances each time they meet with her beneficiary lawyer and believe me, they are very interested in the net worth including the value of the house which each of them own as part of a trust with their mom.

Just because you wouldn't use it doesn't make it useless. You just lack imagination :)

When you're dead other people have an interest in your net worth...the government wants to collect estate and inheritance taxes and heirs fight over every last scrap of bacon left on the plate.  Maybe this is an argument for getting paper investments out of street name and holding the physical certificates.  The government doesn't see them and you can sign the certificate over to whomever you want.

I don't like paying taxes and will personally try to get around it legally when possible (like going into a trust with my parents when it's time). But as a hypocritical socialist I HATE the idea of no estate/inheritance taxes being standardized. We would feel it somewhere else....like throughout the infrastructure of our social services which barely help keep society from turning into crabs in a barrel, where the disenfranchised swarm up to swallow the higher rungs.

[BoonDogle]

Net worth probably means very little to anyone other than the person that it applies, that is, unless accompanied by other numbers such as spending levels, etc.  The debate about what belongs in net worth and what does not is more of a personal preference unless comparing side by side with others.

I put house and cars into the computation and use it for personal motivation to hit benchmarks.  However, I also keep a separate, and more useful, computation that I call retirement net worth, which is just liquid assets less all liabilities.  That is the number that I use to keep track of where my crossover point lies.

[Lmoot]

if you leave your house out of networth and you know how much you spend when your spendingx25 <= your network you're done working its a 100% useful calculation and thats the basis of this entire forum.

A paid off house is worth at least as much as the rent it displaces X 25 then.  If rent would be $1000 in FIRE, then if you have a paid off house it must be worth the equivalent of $300,000 in an investment account ($12,000 * 25).

you dont count your home in the equation when you own a home.  if you're renting yes but you expenses when calculated for FIRE should be what comes out of your bank account mortgage or no mortgage paid off or not.  you're just trying to do fancy math and you're not accomplishing anything. 

rent isnt an expense for a homeowner so its not counted.  your expenses shouldnt be calculated at what you spend now but at what you plan to spend when retired.  i almost didnt respond to this comment but there is a large gap in understanding here with what you wrote

I disagree. Your house is still an asset. You borrow from it, put it up for collateral, sell it and collect. Including the value of your house in your networth calculation is not fancy useless math if you intend on selling it down the road. It's also useful if you keep it, in determining how much you want to leave your heirs balanced against how much of your cash you can spend to meet that goal. By including the house, you can up the amount of cash you're willing to live on, since you'll know the value of the non-cash assets. Hearing my dad and aunt discuss my grandmother's finances each time they meet with her beneficiary lawyer and believe me, they are very interested in the net worth including the value of the house which each of them own as part of a trust with their mom.

Just because you wouldn't use it doesn't make it useless. You just lack imagination :)

Its useless from a stance of calculating FIRE.  if i spend 50k a year i need an INVESTED networth that i can withdraw from of 1.25MM ... if i include my house in that at being worth 200k i dont now magically only need to have 1.05MM invested in VTSAX or the like.  i still need 1.25MM invested there.  you can include it or not include it but when calcing FIRE it doesnt matter as long as you do it correctly. so add it in then subtract it out to figure out when you can FIRE. you're being too imaginative and people will get confused ... the OP was is NW a stupid calc ... the answer is no its an essential calc to FIRE esp. when you remove your house.  if i spend 50k a year and have a NW of 1.25MM all tied up in a house i plan to live in NO I CAN F"N FIRE.  so when calcing FIRE NW you remove assets from the NW that you plan to keep in FIRE. 

Yeah when figuring out how to divvy up dead people's assets the house plays a role but in the realm of a FIRE forum and the question is NW stupid the answer is no

Exactly, that you plan on staying in. But you do know that downsizing is a thing, right? I understand that cash from a sale doesn't automatically produce dividends, but neither are dividends the only path to FIRE. You could use the cash to live off of, or invest elsewhere, like buying investment properties, or starting a business. Or if you prefer it, to reinvest in the market to get your precious dividends. So again, just because it is not useful to you in the path that you have chosen to FIRE, to someone who has the imagination to make it useful in theirs, makes it a valid value in determining FIRE.

I doubt my imagination is smart enough to confuse anyone. I have faith in folks here. Plus that sounds like something someone would say if they're worried there might be another solution besides the one they've chosen. It's okay. We are allowed to take different trains to the same station.

[MrsDinero]

I don't think using net worth is a stupid calculation.  There has to be some sort of measuring stick in determining financial health.  It really just depends on what your goals are. 

On these forums, net worth is a tool to determining financial independence, but it only matters to the person it belongs to. 

Banks don't care about your financial independence all they care about is your ability to manage your current debt.

My husband and I were having this discussion the other day when we were talking about subprime auto loans.  It used to be (back in the good old days) where banks wouldn't lend you money unless you could prove you had assets.  Only the rich (or high net worth)  has credit/charge cards, etc. 

[Vagabond76]

It used to be (back in the good old days) where banks wouldn't lend you money unless you could prove you had assets.  Only the rich (or high net worth)  has credit/charge cards, etc.

The banks only care about income and debt service--in other words cash flow--not assets or liabilities.  The income can be from assets (rents, royalties, or dividends) or a job, which I would consider an asset, or something like court-ordered alimony.  They tend to frown upon other cash flow sources, such as period gifts from family members and bank heists.

The only time an asset means anything to a bank is if it is used as collateral.

[SwordGuy]

1. figure out how much you plan to spend in FIRE including a mortgage on your house rent etc. whatever you expect your total expenses to be
2. invest money either in index funds or property or whatever loopity doopity you want
3. when your investments are more than your expected retirement expenses x 25 you are FI and can RE when ever you want.

When the income produced by your investments > your expected retirement expenses and your investment income will grow along with inflation, you are safely FI.  If your investment income will not keep up with inflation, you are temporarily FI.

The 25x rule is only applicable for a stock/bond based investment income scenario.

[HPstache]

if you leave your house out of networth and you know how much you spend when your spendingx25 <= your network you're done working its a 100% useful calculation and thats the basis of this entire forum.

A paid off house is worth at least as much as the rent it displaces X 25 then.  If rent would be $1000 in FIRE, then if you have a paid off house it must be worth the equivalent of $300,000 in an investment account ($12,000 * 25).

you dont count your home in the equation when you own a home.  if you're renting yes but you expenses when calculated for FIRE should be what comes out of your bank account mortgage or no mortgage paid off or not.  you're just trying to do fancy math and you're not accomplishing anything. 

rent isnt an expense for a homeowner so its not counted.  your expenses shouldnt be calculated at what you spend now but at what you plan to spend when retired.  i almost didnt respond to this comment but there is a large gap in understanding here with what you wrote

I disagree. Your house is still an asset. You borrow from it, put it up for collateral, sell it and collect. Including the value of your house in your networth calculation is not fancy useless math if you intend on selling it down the road. It's also useful if you keep it, in determining how much you want to leave your heirs balanced against how much of your cash you can spend to meet that goal. By including the house, you can up the amount of cash you're willing to live on, since you'll know the value of the non-cash assets. Hearing my dad and aunt discuss my grandmother's finances each time they meet with her beneficiary lawyer and believe me, they are very interested in the net worth including the value of the house which each of them own as part of a trust with their mom.

Just because you wouldn't use it doesn't make it useless. You just lack imagination :)

Its useless from a stance of calculating FIRE.  if i spend 50k a year i need an INVESTED networth that i can withdraw from of 1.25MM ... if i include my house in that at being worth 200k i dont now magically only need to have 1.05MM invested in VTSAX or the like.  i still need 1.25MM invested there.  you can include it or not include it but when calcing FIRE it doesnt matter as long as you do it correctly. so add it in then subtract it out to figure out when you can FIRE. you're being too imaginative and people will get confused ... the OP was is NW a stupid calc ... the answer is no its an essential calc to FIRE esp. when you remove your house.  if i spend 50k a year and have a NW of 1.25MM all tied up in a house i plan to live in NO I CAN F"N FIRE.  so when calcing FIRE NW you remove assets from the NW that you plan to keep in FIRE. 

Yeah when figuring out how to divvy up dead people's assets the house plays a role but in the realm of a FIRE forum and the question is NW stupid the answer is no

Man, really?  Yes, if you spend 50K a year and are a renter (lets say $8K of that per year is your rent), you would need 1.25MM in investements to live off the SWR.  If you own your house outright, then your WOULD only need 1.05MM to live off the SWR because you'd be spending would be $42K a year as you're not paying paying rent or a mortgage.

Are you confused that I am saying equity in a home that is still under a mortgage should be included in your FIRE calculations?  No... I'm not saying that.  I'm saying a FREE AND CLEAR home should be since it should be viewed as worth the equivalent the rent you'd have to pay otherwise X25.

Maybe think about it in terms of something you do likely own... like a car.  In early retirement, if you need a car, you could choose to own a car outright or you could chose to continually lease new cars that you never own until you die.  In the latter case, your expenses per year in ER would be greater than your expenses if you didn't have a lease payment... would you not agree with that?  You would then have to say, that the value of that car you own from an equivalent FIRE investment point of view would  the difference between leasing and owning x 25.

Please, don't act like you're surprised when you see that people own their own homes and cars outright don't need nearly the investments to FIRE than those who choose to rent and lease the rest of their lives.

[robartsd]

A paid off house is worth at least as much as the rent it displaces X 25 then.  If rent would be $1000 in FIRE, then if you have a paid off house it must be worth the equivalent of $300,000 in an investment account ($12,000 * 25).

Not quite, you have to deduct property taxes, mainanance, and any other costs that you incure as a homeowner that you would not incure as a renter from what rent would be before applying your withdraw ratio math, so the paid of house in your example might really only be equivilent to $150-200k in an investment account.

[Vagabond76]

Going back to my original post, I don't get the point of net worth.  Suppose John Doe needs $50k a year to live.  The 4% SWR would seemingly suggest he needs "net worth" of $1.25M (we can debate what is included later).

But it's not the net worth that one lives off of but the cash flow.

Instead of buying $1.25M of VTSAX, suppose John Doe buys 5 rental houses.  He pays $200,000 each with 20% down and an 80% mortgage and rents them for $1800 per month.  The "net worth" of all these properties is $200,000, yet he could  possibly garner the same $50k in cash flow.  Before you protest--yes I understand he can also make nothing or even go broke.

In either scenario, if the cash flow from the asset remains constant, who gives a shit if the value of VTSAX or the rental houses gets cut in half?  In the case of VTSAX, net worth is cut in half.  In the case of the houses, then Bobechs' negative net worth scenario comes true.  But why care?

[HPstache]

A paid off house is worth at least as much as the rent it displaces X 25 then.  If rent would be $1000 in FIRE, then if you have a paid off house it must be worth the equivalent of $300,000 in an investment account ($12,000 * 25).

Not quite, you have to deduct property taxes, mainanance, and any other costs that you incure as a homeowner that you would not incure as a renter from what rent would be before applying your withdraw ratio math, so the paid of house in your example might really only be equivilent to $150-200k in an investment account.

yes, yes, yes, I should have said "approximately"... I was going go into that detail, but prefer to keep things simple for the point of the argument.  But the actual truth in the matter, just as an FYI, is that taxes and maintenance ARE built into the cost of someones rent.  The point of my argument is that an owned home does have an equivalent investment value in early retirement.

edit: I realized I deleted the word "approximetly" in my original post when I got rid of the taxes and maintenance part :P

[boarder42]

Going back to my original post, I don't get the point of net worth.  Suppose John Doe needs $50k a year to live.  The 4% SWR would seemingly suggest he needs "net worth" of $1.25M (we can debate what is included later).

But it's not the net worth that one lives off of but the cash flow.

Instead of buying $1.25M of VTSAX, suppose John Doe buys 5 rental houses.  He pays $200,000 each with 20% down and an 80% mortgage and rents them for $1800 per month.  The "net worth" of all these properties is $200,000, yet he could  possibly garner the same $50k in cash flow.  Before you protest--yes I understand he can also make nothing or even go broke.

In either scenario, if the cash flow from the asset remains constant, who gives a shit if the value of VTSAX or the rental houses gets cut in half?  In the case of VTSAX, net worth is cut in half.  In the case of the houses, then Bobechs' negative net worth scenario comes true.  But why care?

you're just arguing semantics over how you manage to create you income.  if it comes from something where the 4% rule doesnt apply then it doesnt matter.  if it comes from the 4% rule then it matters.  i think that clears up your entire question.

[Lmoot]

It used to be (back in the good old days) where banks wouldn't lend you money unless you could prove you had assets.  Only the rich (or high net worth)  has credit/charge cards, etc.

The banks only care about income and debt service--in other words cash flow--not assets or liabilities.  The income can be from assets (rents, royalties, or dividends) or a job, which I would consider an asset, or something like court-ordered alimony.  They tend to frown upon other cash flow sources, such as period gifts from family members and bank heists.

The only time an asset means anything to a bank is if it is used as collateral.

Every single time I have applied for a credit card, they asked if I own my home. Granted I can't be sure why they ask, but I don't think they're just being nosey.

[MrsDinero]

It used to be (back in the good old days) where banks wouldn't lend you money unless you could prove you had assets.  Only the rich (or high net worth)  has credit/charge cards, etc.

The banks only care about income and debt service--in other words cash flow--not assets or liabilities.  The income can be from assets (rents, royalties, or dividends) or a job, which I would consider an asset, or something like court-ordered alimony.  They tend to frown upon other cash flow sources, such as period gifts from family members and bank heists.

The only time an asset means anything to a bank is if it is used as collateral.

Every single time I have applied for a credit card, they asked if I own my home. Granted I can't be sure why they ask, but I don't think they're just being nosey.

I'm not necessarily talking about current banking practices, hence the "back in the good old days" reference.   

[Kaspian]

Net worth is more than useless when people update it every single day using a Zillow property value.  However, net worth is a very important number to me--when my net worth in liquid assets (i.e., money and investments) reaches 25 times my annual spending, I'm done this whole ballgame.  :)

[Fishindude]

If not using it for business, net worth is just a "personal scoreboard" of your finances so you can keep track of where you are at. 
So long as you keep things updated and track the numbers and calculations in a consistent manner, you can check your personal financial statement to see if you are gaining or losing ground financially.

If you are taking out large loans or a large line of credit to run a business, most banks want current personal financial statements which are updated at least annually.  The borrower is often required to pledge certain elements of his net worth against those debts to assure the bank he has ability to pay the loan in event of a business failure.  My bank and bonding company always required this information, as well as personal guarantees against any loans.

You are right that many don't have much use for the information, however I would encourage anyone interested in personal finances to maintain a personal financial statement for use as their personal $$$ scoreboard.

[tarheeldan]

this thread and some responses are so weird

Net Worth = Assets - Liabilities

How is that not useful? It's basically my liquidation value, less transactions costs, which I could then apply the 4% rule to.

Not including real estate? In a static model, I sorta get it since your expenses are lower - but you might move to a lower/higher COL location, at which point it makes a lot of sense to include it.

[kite]

It's a pissing contest, largely.   Comparisons are odorous, as the Bard wrote in Much Ado About Nothing.

We are creatures obsessed with data but with imperfect understanding of what the data actually say.  My networth on paper was N at age 25, now it is 100xN, but I'm 25 years closer to the eternal dirt nap.  I face the unknown yet certainly smaller number of remaining years with a 50 years old (and getting older) body, not one that is 25 or 30.  The "on paper" networth calculation took health, eyesight and fecundity for granted at 25.  Wasn't the value of those things, now diminished, basically incalculable?  What's been gained? What's lost?  Was it worth the trade?  Back to the Bard:  All that glitters is not gold.

[Villanelle]

this thread and some responses are so weird

Net Worth = Assets - Liabilities

How is that not useful? It's basically my liquidation value, less transactions costs, which I could then apply the 4% rule to.

Not including real estate? In a static model, I sorta get it since your expenses are lower - but you might move to a lower/higher COL location, at which point it makes a lot of sense to include it.

What goes does it do me to know I have $1mm in net worth?  So what?  What about that is actionable?  As far as I can tell, nothing, unless I plan on selling absolutely everything and living on the streets in a $0 net worth cardboard box. 

You can't apply the 4% rule to your car (unless you plan on selling it) or your sofa (are you going to sit on 4% less every year and sell off the cushions over time?), or your house (unless you plan on downsizing) or your grandma's pearls or your father's stamp collection.  All those things are in your net worth.  You ask how that isn't useful; explain to me how it *is* useful?  The only that that is actionable (and therefore, in my mind, useful as more than just a fun spreadsheet game) is assets you plan to liquidate for fire--investment accounts, difference in current home equity vs. planned downsize cost I suppose, dad's stamp collection that you do plan to sell, etc.  The pearls that you would never part with and the portion of your home equity you plan on keep in home equity doesn't seem actionable, and thus it doesn't seem useful, as anything other than maybe an ego boost or a pat on the back. 

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. 

[tarheeldan]

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.

[slugline]

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.

[Dicey]

Every single time I have applied for a credit card, they asked if I own my home. Granted I can't be sure why they ask, but I don't think they're just being nosey.

I think they mean "Do you own vs. rent? Not "Is the home that you own mortgage free?"

[ender]

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.

Well to be fair you could sell some of them and depending on how much stuff you have... maybe you could :-)


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.

[Lmoot]

Every single time I have applied for a credit card, they asked if I own my home. Granted I can't be sure why they ask, but I don't think they're just being nosey.

I think they mean "Do you own vs. rent? Not "Is the home that you own mortgage free?"

That's how I interpret it also. But whether you own it in full or not, the full value is typically included in NWC; then of course if anything is owed, that's added onto to the liability side. I'm assuming they're inquiring because it's useful to them as an asset....or potential collateral. So it does in fact mean something to the banks.

[marty998]

Language is interesting.

I prefer to say net assets... the sum of your net worth as a person should not be related to money.

On topic, yeah there's a number of ways you can slice a net assets calc. Ultimately you only need enough for your circumstances, not anyone else's.

[chesebert]

Depending on how you calculate it.

My calculation: net financial assets (excluding primary residence). I do include rentals as financial assets as they are income producing. I don't own any gold/silver bullion, but those can be considered financial assets as well (not gold/silver jewelry).

Everything else you own is irrelevant for FIRE.