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13
May 10
Thu

Net worth as one life metric

Net-worth Obsession is a Times article about people who track and publicize their net worth online. They total their assets, take away their liabilities, and are left with their net worth (or, if they were a company, equity). It’s a single number which encapsulates their economic well-being. Kind of like a score in a computer game.

Kincer happened upon a Web site called NetworthIQ, which allows people to record their net worths and display the ups and downs for anyone to view. Most people who share their data do so anonymously, but Kincer posts a link to his personal Web site, where he uses his real name. Kincer especially liked that the site allowed him to compare himself with others. It appealed to the Mega Man player in him. “NetworthIQ is kind of a game,” he said. “Can I get ahead of everyone? Can I be up there with the big shots?”

The interest in net worth is a kind of reaction to using salary as the benchmark number. Like a company’s income statement, even if you pull in a healthy revenue, if your expenses exceed your revenue, you’re not in good financial health. The converse is true, of course. If you only look at the balance sheet (net worth), you’re only seeing one part of the picture.

This is intuitive because managing personal finances is really not that different to running a business. You have your revenue (salary, interest on deposits, cap gains on investments, one-off bonuses like winning the lottery, etc.), and you have your costs (rent, entertainment, interest on loans, etc.). The difference between the two is hopefully profit. And how you deploy your profit, over the long run, can impact your net worth as much as what your salary is. Bankruptcy happens when your costs exceed your revenue, and your negative net worth exceeds your credit limit.

Eric Mills has tracked his net worth over time, which results in a pretty cool graph.

Mill now saves a quarter to half of his take-home pay in a savings account in an online bank, but he is not making as many extra payments as he could on the $20,000 or so in student loans he is carrying, nor does he have any money set aside for retirement. “I put a much higher value on flexibility,” he says. “And I feel like the better investment right now is in me. It’s much more important that I have as much freedom and liquidity as I can.”

Net worth is not precisely calibrated with financial freedom. If Mill used all of his savings to pay down some debt, his net-worth figure would remain the same, but he would have no emergency fund if he lost his job. For this reason, he has come to think of the figure as a number that doesn’t really tell his whole story.

However, to be more accurate, if he used some savings to pay down his debt, his net-worth figure would be higher over time. (Personally, Mill’s approach strikes me as a little myopic, but personal financial circumstances differ so much that any comment like that would be just speculation on my part.)

Tangentially, the U.S. has been running huge budget deficits, but unlike you or I, it can simply increase its own credit limit if Congress approves… which it would always do, otherwise the U.S. would default on its loans and the world economy would collapse. The U.S.’s self-issued line of credit – the debt limit – is now almost $14.3 trillion.

Hopefully, one thing that will occur to most of us while reading this article is the thought that crops up in the back of our mind that “happiness is not about maxing a number”. True, but in the case of net worth, it is one aspect of it, although research has typically shown it’s diminishing returns after a certain point.

  12:33am  •  Business & Finance  •   •  Tweet This  •  Add a comment