Is Net Worth It?
You can work it (and you should..) Put down your credit card, flip it and reverse it (back into your pocket!)
Recently, the WSJ featured so-called ‘extreme renters’ who own as little as possible, beyond the obvious categories (housing and transportation). We’re talking clothing, furnishings, tools, mobile phones - even plates and cutlery.
What’s up with this?
Many of the folks featured cite convenience, and getting tired of using the same items over and over (after all, who doesn’t love that “new silverware” smell…?) as good reasons for going this route.
However, the elephant in the room is - what happens if someone that rents nearly all of their possessions finds themselves out of a job? Would they even be able to afford to keep renting the same professional attire in order to interview for a new one?
Absent a decent savings cushion or assets that they could sell to raise money, who knows. This is pretty scary, and its what we’re here to talk about this month: the concept of net worth.
Sounds jargony, finance-y and lame, but its super simple and super important. Your net worth is simply the sum of value of everything you own, less the sum of everything you owe. That’s it!
You can figure this out in less than five minutes on the back of a napkin using tools like Redfin, Zillow and Realtor.com for real estate, KellyBlueBook for vehicles, and Facebook Marketplace, Craigslist or eBay for more specific items (furniture or collectibles, for example).
If you’ve got cash or stock, that’s stuff you own. If you have student loans, car loans, a mortgage, or any kind of debt whatsoever, that’s what you owe. Hopefully your net worth is in the positive, but wherever its at, its a huge first step to even know the number at all (most people don’t!) This simple calculation can inform how you set goals and organize your financial life as its both concrete and easy to measure.
More debt? Net worth becomes more negative.
More cash, real estate or stock? Net worth becomes more positive.
To contrast, lets take a fictitious person owning absolutely nothing, earning $6,000/mo in take-home pay and making payments of $6,000/mo on a rented apartment, leased car, rented clothing, furnishings, phone and silverware. Assuming they had no savings, they would start a given year with net worth of $0 and end the year with a net worth of $0. Basically, they are living hand to mouth and can quite literally never afford to stop working.
Contrast that with someone earning $6,000/mo in take-home pay and making payments of $4,000/mo on a mortgage and car payment, $2,000 on other living expenses (for simplicity’s sake we are also assuming this person has no savings nad is not saving any money every month).
Let’s say at the end of the year, the home’s value is $500,000 and they owe $350,000, and the car’s value is $30,000 and they owe $10,000. They own their clothing. They own their furnishings and phone. This individual is ending the year with a net worth of at least $170,000! Not bad.
In a job-loss scenario (or a scenario where they had to stop working for a TBD amount of time, this is about how much they could expect to walk away with after selling their home and their vehicle and presumably trade into renting both of these things. Importantly, they also own the basics (clothing, mobile phone etc.) meaning they don’t have to continue to come out of pocket to use those things.
Which one of these scenarios seems more appealing? Keep in mind that the 2nd person might also decide to stop working because they want to take a break and travel. They may have a health issue, or a family member may. They may want time to focus on their children, or their relationship, or the latest Netflix series. Any number of scenarios might arise in which trading time for dollars is not preferred and the only thing we can know for sure is that we don’t know what the future holds.
Time is finite. Dollars are not. Once time is gone, its gone forever. The more time you spend in pursuit of earning money, the less time you have for literally everything else.
Unless you own assets that generate income for you, even when you can’t or simply don’t want to work, you will be caught in a trap of trading your time for money. This group of extreme renters, absent some random windfall (think winning the lottery or inheriting millions) are all but guaranteed to remain in this trap into perpetuity.
So, what to do?
If the concept of net worth is unfamiliar to you, or if you’ve simply never questioned the good old American mantra to “go to a good school so you can get a good job and buy nice things” it’s well worth your time to pick up a copy of Robert Kiyosaki’s "Rich Dad, Poor Dad” which follows the lives of two gentleman that work equally hard and achieve wildly different financial outcomes with their efforts.
One goes to college, gets a good job, and works hard for 60 hours a week to buy a nice primary residence, cars, family trips and so on. His net worth hovers around zero, forever.
The other also works hard for 60 hours a week but spends his time buying and building businesses. They prioritize spending their money on things that earn a return (such as real estate) and shy away from lifestyle spending that looks cool in the moment but does nothing but guarantee a need to return to the grindstone the following Monday morning. His net worth increases slowly at first, then skyrockets.
Framing your future financial decisions in terms of their impact to net worth can be so clarifying, and so freeing.
“You want me to sign up for that subscription? its going to cost me X/hrs. a month to continue to pay for it. Easy no.” vs.
“I will automate that same amount of money into a low cost index fund like VTSAX every month, knowing it will generate more and greater dividends for me over time, even when I’m not working. Easy yes!”
If you take a single thing away from this installment: please don’t discount the value of your future time! Knowing your net worth today is a great place to start, and your future self is well worth the effort required to increasing it.
Thanks for reading and have a happy October!