It’s fairly common for personal finance bloggers to track their Net Worth. Some even post their Net Worth on their blog for the world to see. For various reasons I’m not one of them. The first obvious reason to long term readers is the impact on others. But, there is another reason. Net Worth is not all that important for my financial plans.
Now let me start by saying, yes, I obviously do need a certain Net Worth number when I retire. In order to sustain a living, post-work I need assets. Also, yes I have a sufficiently large amount of Net Worth to be considered Financially Independent at least in the most basic sense. However, both of those are one time milestones way out in the distance. Focusing on them in any significant way would likely just demotivate me since they are way in the future. So at least in the near term Financial Independence and a Net Worth capable of supporting my desired retirement are not my primary motivation.
Net Worth is Not a Good Metric
I know those who have been reading here for a while are now saying, Didn’t you say to set milestones and sub goals to support your longer term goals? If my long term goal is Financial Independence, as is everyone’s, then shouldn’t I set Net Worth Goal Posts along the way? Well, yes I did say that, but Net Worth is a terrible measure of my yearly progress towards Retirement and prior to that Financial Independence. You see Net Worth is not a SMART Metric, especially once you’re approaching Financial Independence.
Most Net Worth Changes Around and Above Financial Independence are Outside Your Control
A few weeks ago in a comment on Physician on Fire the topic came up of what happens when your investments return more then you can save in an average year. The Green Swan spoke to this point a few weeks before referring to it as the Inflection Point or Fire Starter. The problem with this point is it swings both ways. So let’s take 1999 for example. The S&P 500 increased almost 21% in 1999. If you had a portfolio with a Net Worth of 1 Million dollars invested in the S&P 500 then your investments increased your Net Worth $210K. That means if you put absolutely nothing into your savings you could still in theory claim success. On the flip side look at 2008. The return of the S&P 500 was -37%. Or on the same portfolio you would have decreased your Net Worth by $370K. Now imagine if you saved almost 100K in 2008. That means your Net Worth only decreased by $270K. So is 2008 a failure from a financial perspective? Is it worse then 1999? Was your behavior flawed in 2008 if this hypothetical situation was you?
Would investing 100K in 2008 be worse or better then $0 dollars in 1999.
Well, let’s step back and think about those questions for a minute. Which Situation is Superior, saving 100K in a down market or investing 0 dollars in a year where the market returned 19%.
Saving is Inherently a Good Behavior
The first is the obvious, if you are saving something your behavior will lead to more long term success then if you spend all your earnings each year. Sure 0 dollars savings in 2008 wouldn’t kill you. But if you never invested another dollar again from a million dollar portfolio then you’d likely outlive your money unless you chose a really specific frugal lifestyle. So savings rates like in my hypothetical 2008 example are definitely preferable behavior.
In the Long Run Contributing Savings in Addition to Reinvesting Market Returns is Superior
The second point may be less obvious. What happens to that portfolio over time. Sure the market tanked in 2008, but depending on when the money went in, it was invested at a lower stock market valuation then 1999. So let’s assume a mid point in 2008 as when the money was invested. So half of -37% is down 19%. So in 2008 the portfolio lost another 19% after you deposited the 100K. You’d leave 2008 with 737K. However, if you did not invest another dime it was up in 2009 by 26% (928K) and 2010 by 15% (1,068K).
1999 meanwhile was up 21%. So at midpoint lets assume 10%. So in 1999 you’d have a portfolio of $1100K . However in 2000 you’d lose 9% ($1,001K) and in 2001 you’d lose 12% ($880K).
| Starting Point | 1999 | 2008 |
| 1999/2008 | 1100K | 737K |
| 2000/2009 | 1001K | 928K |
| 2001/2010 | 880K | 1068K |
So the end result in the long run is the person who invested the 100K in 2008 did better then the person who did not invest in 1999. Now sure there are scenarios where the sequence of returns will come out ahead for market returns over savings in the short run. But over the long run saving new money will exceed just relying on your returns every time. And yet if you use Net Worth as a yard stick you would not view 2008 as a successful financial year. It might even demotivate you from further savings.
Net Worth is Not All That Important For My Financial Plans
For these 2 reasons, Net Worth is not all that important for my financial plans. Simply put, I want to encourage myself to execute good financial behavior like savings rates, spending controls, and investing for the long run. I want each milestone to reward proper performance at the time they occur, not years later as in 2008’s case. As such I set my goals and plans against things I can control. Things like savings rates and my yearly expenses. I leave Net Worth as something I check a few times a year mainly for re-balancing purposes and to ensure my end milestone has not snuck up on me.
Do you measure Net Worth? Have you done so through a down market? Do you use Net Worth as a goal or part of a plan?
I track net worth over time to get a sense of progress towards my goals of financial success. To your point, I don’t necessarily have or care about my final number. I’m pretty young, 24, and I believe I could be worth between $3-5 M when all is said and done. I don’t know the future though; I could start a business, make it worth millions, and retire at 30! I’m working towards something like that, but at the same time, I could start a business, and end up back at 0.
Thanks for the post, have a good one!
Hi Erik,
Nothing wrong with checking it out from time to time. I’m most worried about the demotivating factor of using it as a yardstick in a down market. Thanks for adding your perspective.
It can definitely be a demotivating factor. Many certainly experienced that after 2008. I was necessarily demotivated, but it seemed like a mild form of depression there for a while…like the markets had betrayed me. But long term habits like you mentioned above are what got me through. I continued to invest (buying low) and sure enough the market bounced back (fairly quickly…).
Thanks for mentioning my post! As you can tell, I check my net worth frequently. But I can readily admit there are pros and cons to that behavior.
For better or worse I’m more cognizant now of my net worth then I was in 2008. The challenge is staying the course when 2008 inevitably repeats, now or in the future.
I definitely track my net worth and think it’s a metric that everyone should know for themselves. However, it’s certainly not the only one or the most important. I’ve commonly seen people that live paycheck to paycheck and pretty much only have equity in their house. Their net worth is basically equal to their equity, which isn’t really helping them much now in their financial situation.
I think along with your savings rate, your availability of emergency funds and other financials net worth is an important number but not the ONE number you need!
Combining it with other measures is one way to get around my concerns with the number. I tend to break it down into its components. Ie. if I save x this year of income, and my investments match my investment plan, then over the long run net worth will be fullfilled.
A subject near and dear to my heart 😉 I agree with you. Net worth is just a reference point, it’s not the ultimate goal. Having said that, it’s important to have an investment goal if you’re looking to achieve financial freedom earlier than most. That goal would obviously be a component of your net worth but not the entire story. It’s also a useless metric as a comparison with others if used as an absolute number, what makes up your net worth (the quality) is much more important than the quantity.
So true. If your net worth is a million a year and you spend a million a year then your situation is way different then the same person who spends 50k a year. If your net worth is locked away in illiquid whole life insurance your way worse off then someone with a million dollar investment portfolio.
I really don’t track net worth mostly because most of mine is in retirement accounts already. I don’t tend to count my home equity and cars since I will need a home, and cars in retirement too. I may very well downsize but that should be minimal compared to my retirement savings. My goal is to have 2 million, in retirement accounts because that is my magic number that I am guessing someday they will introduce means testing on. 4% is 80K per year (minus taxes) + social security makes it game over for me. That is not to say I will stop working that day but that is my day I ready FU money as they say.
I think the point is when you say max out you and your spouses 401k contribution limits say ~36k per year, and if your investment gains are above that, you are coasting to the finish line, it’s in sight. That’s at least how I look at it.
Very true, it takes surprising little to create fu money as long as your consistent. I also agree with you cars and houses are not counted in my net worth. I noted what I do include when I peek, here: https://fulltimefinance.com/how-to-calculate-net-worth/
Good post FTF. We all track net worth, but I agree that a figure as volatile as that (for those of us with most of our assets in equity markets) can’t be anything more than a ‘feed good’ number. It doesn’t give you actionable intelligence on your own comfort factor in FIRE. What I find more useful is the Passive Income generated by the retirement assets. If the passive income covers all your expenses in 1999 and in 2008, then net worth truly doesn’t matter.
A passive income view is a great alternative, thanks for the comment.
I personally do not use Net Worth for my financial goals/planning. For me a better gauge is my savings rate. I know if I can continue to push up my savings rate each year that I will have more than enough money when it comes to retirement. Plus like you said if the market has a huge drop like in 2008, if anything I want to put more in the market so I can buy the cheaper shares, but using Net Worth it would have been a “terrible” year on paper when in reality it would have been an incredible year based on value.
It sounds like we’re very much aligned on our approach.
“encourage myself to execute good financial behavior like savings rates, spending controls, and investing for the long run”.
I completely agree with you! It’s more about establishing good saving and spending habits and then the net worth will follow by itself. I track net worth more of just as a macro view to make sure all my account balances look fairly normal as I would expect them. It also motivates me to make goals for myself like let’s say increase it by 10% in the next quarter.
I look at ours about twice a year. It might be 10% of my focus, where our cash flow (in and out) is 90% of my attention. If we have more coming in than going out, I suppose the net worth doesn’t matter all that much. =) I have posted it once on my blog (probably will update it once a year), mostly to show that we were low earners, don’t have a huge net worth (600k) and yet are living life on point. All our time and energy is focused on things we really value and add meaning. And we do it with 5 kids. In some ways, I feel like we are the worst case situation, with the best case outcome. =)
More power to you with the kids. We have two and that’s hard enough. Still they can also be a great motivator.
I do track my net worth and use it as a goal to see if I am on track or not. However, how I measure my success on an annual basis is the things that I do during the year. How much did I save compare to last year, what did I do to increase my wealth, did I do anything to increase my income potential? These are the things that I do to assess performance. Net worth is just a number.
Another vote for tracking loosely but not using as license to ease up on our goals simply due to girations in the market. I guess you could say we keep tabs on a MNW (or modified net worth) which doesn’t include our housing equity, college savings, or cars. Its really our glorified retirement stash if you omit the other stuff. We like the idea of finding ways to save a little more each year vs. The last. Its kind of like beating your PR. This keeps us focused and motivated.