Why Net Worth is My Sassy Gay Best Friend

Posted on September 30, 2010 15 Comments

Net worth is a funny concept. You can have a huge house, glam wardrobe, luxe car and a fancy lifestyle, but a low net worth. Alternatively, you can live in an apartment with minimal swank, have no car, stay in often and have the highest net worth on the block.  You don’t need a PhD to have a high net worth; in fact, if you just got a PhD, you might even have negative net worth. Some financial planners dismiss net worth as an irrelevant concept, while some savvy savers track it obsessively. The New York Times ran an article on net worth recently, and readers got so cranky that the dude profiled in the piece had to write an open response letter. So what gives? What’s the deal with net worth?

I first wrote about net worth in 2006. I’ve tracked it ever since (with the exception of when I was ignoring my 401K in 2008). To put it simply, net worth measures what you have (assets) and subtracts what you owe (debt). The resulting number is your net worth. There are plenty of good ways to track your net worth, from a handy-dandy home built spreadsheet to free online tools like calculators,  and free services like Mint.com and NetWorthIQ which do most of the work for you.  Net worth is an easy concept to understand, and, in my opinion, a great starting point for financial newbies. Especially for overachievers and A-Types like me.

See, I track almost everything I do. I count calories. I regularly follow fitness plans to get in shape for races. I check items off my to-do list daily (heck, sometimes I even add items that are already done to my to-do list just so I can cross them off). That’s why net worth was an easy concept for me to rally around – it’s basically calorie-counting for your finances,  but with much faster (and far less painless!) gains.

When I first calculated my net worth four years ago, it was (drumroll please) $2,800, according to my post. Determining my net worth was an important step in my financial life because, like Second City’s sassy gay best friend, net worth tells it like it is. And my net worth told me I needed to make some changes in my spending patterns.

Although determining my net worth was daunting, I was really pleased with the results once I started tracking my progress regularly. I could see my numbers moving with every loan payment and every dollar saved. It motivated me to save more, pay off more, and stay away from making big purchases that depleted from my net worth.

Today, only four years later, my net worth, according to NetWorthIQ, is $117,942 – that includes my cash, savings and retirement, as well as my car and auto loan. Saving feels like a game; it’s fun to see my value rise every month. And yet, I know I have really long way to go before I can afford the basics I’m saving for – which include a house, a wedding, retirement, and more.

So now that you know how I feel about net worth, let’s talk about some of the initial points I raised in the beginning.

• How can someone with so many “nice things” have a low net worth?  Just because someone has a great house doesn’t mean their net worth is high; many people today owe more on their house than it’s actually worth, which can put net worth into the negative dollars. And as far as clothes, cars, vacations, and other splurges? Depends on how they’re paid for. If they’re bought on credit or at the expense of savings or retirement funds, they could be contributing to debt. That doesn’t mean everyone with nice things has low net worth or high debt, it just means you can’t assume people are financially healthy based on appearances.
• Why would a recent PhD have lower net worth than someone with a bachelor’s degree?  It’s all about debt vs. assets. If you graduate with $50,000 in debt, and have no retirement fund or cash, your net worth would likely be very low (unless you had other assets).  Someone the same age with a bachelor’s degree might have less loans remaining to pay and may have already opened a retirement fund. The good news is that it’s possible to turn around net worth rapidly with focused effort. Every $500 loan payment will help your net worth grow.
• Why would a financial advisor dismiss net worth?  The argument I’ve seen is that it doesn’t really paint the whole picture, according to the New York Times article.  But I’d challenge you to find anyone who thinks having a high net worth is a bad thing or vice versa.
• Why would someone track it obsessively?  Some people are very goals driven. They figure that by keeping an eye on the bottom line monthly or more often, they can more effectively reach their financial goals. Not unlike people who keep weight loss journals or apps, or those who use fitness sites to track their progress such as Nike Run or Daily Mile.

I’m clearly in favor of financial beginners determining net worth as a starting point and using that figure to track progress while getting excited about saving money. It might not be for everybody and it might not tell the whole picture, but it’s quick, painless, free and easy to see results. Give it a try and tell me what you find.

Category: Money
   Tags: Net worth

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