We Reached a Net Worth Milestone, But Does It Matter?

by Kevin on September 4, 2009

As a general rule I try to avoid sharing concrete personal financial information for my wife and I. I don’t like to share this information because I don’t believe it is relevant to the discussions we have on this blog.

At the same time I don’t want anyone to think that I’m hiding anything. The conspiracy theorists out there might come to the conclusion that I don’t live what I write… that I’m a spendthrift, I’m in debt up to my ears, or I was born with a silver spoon in my mouth (none of which are remotely true).

I’m guessing these thoughts have likely never crossed your mind and I’m just a paranoid blogger.

Taking all this into consideration I’d like to share a personal success story with you.

We’ve Achieved a Six Figure Net Worth

That’s right. I did our budget at the end of August. I wait until the first of the following month to update our net worth information so that our retirement accounts have a chance to update from the previous day.

And at the end of last month we finally reached a six figure net worth. We can stake our claim, officially, in the “we have more than we owe” territory.

While this achievement definitely gives me the warm fuzzies let me now walk you through why this really isn’t that big of a deal.

Should You Track Net Worth?

This is a question I have struggled with ever since we started tracking our net worth in December 2007.

Net worth is essentially an equation. You subtract all of your debts (credit card balances, student loans, mortgage, etc.) from all of your assets (your home, cash in the bank, retirement accounts, etc.). If you do the math and you have a positive number… congrats. You have more assets than debts. If you have a negative number you have some work to do because your debt is greater than the value of everything you owe.

That is a simple definition, but it begs a lot of questions:

  • Should you include your home value? House prices fluctuate all the time and it really doesn’t matter until the house is sold.
  • Should you deduct realtor fees from home value? Unlike small items that you could sell for cash in a garage sale selling a home costs you money.
  • Should you include the current value of your vehicles?
  • Should you include your untouchable retirement accounts? You would pay significant penalties to cash out your 401k, for example.

There are a lot of other questions, but that is a decent sampling. And considering those questions the way one person tracks net worth can be completely different from the way the next person does. Your big number may mean a lot more than my big number or vise versa.

It just isn’t an easy metric to use because it isn’t standardized.

How We Track Our Net Worth

I take all of our assets and liabilities into consideration including our home, retirement accounts, and vehicles. I take into consideration loans to acquire those assets like our mortgage.

We don’t track the “little” things — like a majority of the items inside our home. That would be too lengthy and difficult to track. (Honey, the couch’s value has dropped another 3.4% this month.)

I also do not take into consideration potential selling costs if we had to liquidate all of our assets. I don’t do this partially because it is hard to tell how much it would cost us to literally sell everything we owned. I’m sure it would be significant especially considering likely realtor fees of 6%.

These costs can severely dampen net worth especially if a large chunk of your net worth is tied up in your home.

What This Milestone Really Means

Reaching a six figure net worth is less an enormous thing to be proud of and more a symptom that the financial plan we have in place is working. It’s like getting a good report from your annual physical.

Here is why our net worth is growing:

  • We are spending significantly less than we earn
  • We are saving for multiple goals at the same time (paying cash for vehicles in 3-5 years, future kid expenses, future kid education expenses, retirement, etc.)
  • We are paying down our second mortgage very quickly and this is, of course, having a big impact on our net worth
  • We have no consumer debt and thus avoid paying high interest costs

I’m proud that we’ve hit this big number. We grew our net worth 3.08% in August . I would guess about half of that is due to investment growth. Since December 2007 we’ve grown our overall net worth 74%. (Can you tell I like numbers?)

But again, we haven’t won the lottery. You could change the way we track several things and drastically reduce our net worth. If I had to guess you could drop the number by at least 30% with just a few changes.

We’re not popping champagne corks or anything like that. Not yet. Champagne is not in the list of goals…

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