Why is knowing your net worth important?

**Caoineag** · 07-29-2008, 05:25 AM

Usually net worth is more important as a potential retirement tool. That is why a lot of people won't include their house in their net worth because they aren't willing to sell it to raise cash. Others do include it because a reverse mortgage would let them take some cash out if things got really tight.

I track it because I would like to eventually retire (hopefully in my 50's). It gives me a running idea of where I am in relation to my goal (currently, no where close but I am also 27).

**MonkeyMama** · 07-29-2008, 05:49 AM

I track it because it shows me the big picture of where I am at and what direction I am heading in.

I actually have a rather aggressive goal to grow my net worth by $30k/year. To do this I rely on our mortgage payments, savings, investment returns, etc. So we kind of piece it all together to see how far we progress every year.

**FrugalFish** · 07-29-2008, 06:11 AM

Originally posted by MonkeyMama View Post

I track it because it shows me the big picture of where I am at and what direction I am heading in.

I actually have a rather aggressive goal to grow my net worth by $30k/year. To do this I rely on our mortgage payments, savings, investment returns, etc. So we kind of piece it all together to see how far we progress every year.

Very well put. This is why we do it as well. It's a yearly snapshot of where we were and where we are, and answers the question of if we are moving in the right direction.

**Scanner** · 07-29-2008, 08:16 AM

There is perhaps a small vein of truth in that some people do it "to brag" but it's kind of the analogous to what companies use - the "Balance Sheet" if you are in business.

Your assets vs. your liabilities tell you how leveraged you are a person/couple, just like a company's balance sheet would tell me whether to invest in them or not (or loan them money if you are buying a bond).

Generally, the more leveraged you are, the less financially healthy you are.

**Broken Arrow** · 07-29-2008, 08:25 AM

Net worth is not without its controversy, but in the end, I think it's a decent barometer for your financial progress. Simply looking at material possessions wouldn't work.

**JinCO** · 07-29-2008, 10:05 AM

I currently have my home listed as an asset in my net worth analysis and my mortgage and heloc listed as a liability. Do most people exclude equity in their primary residence from their net worth calculation?

**Snave** · 07-29-2008, 12:40 PM

I agree that it is a tool that can be used for retirement. I calculate it every so often, but am confused by the bragging comment. Maybe there are some people out there that brag about their net worth, but I can honestly say that I do not know a anyones net worth other than my own that I know personally. I have a few friends that like to show off their material possessions or might make a comment about a stock that did really well for them, but that is usually as far as it goes. No one I know runs around saying they are worth X amount. Heck, it's probably because when they subtract their liabilities they have little net worth anyway.

**Like2Plan** · 07-29-2008, 12:55 PM

I think of Net Worth as everything you own and how much you would get if you cashed everything in to settle your estate.

I think it is a good as an estate planning tool. If your Net Worth reaches a certain level, then you have to spend some money on some advice from a good estate planning attorney or your heirs will receive a gift made substantially smaller by estate taxes. (I think it is currently 2,000,000 but goes to 3,500,000 in 2010?)

**maat55** · 07-29-2008, 01:35 PM

Originally posted by JinCO View Post

I currently have my home listed as an asset in my net worth analysis and my mortgage and heloc listed as a liability. Do most people exclude equity in their primary residence from their net worth calculation?

I keep track of both. On my excel spreadsheet, I have a separate balance for both. I personally believe that the most important is the, less equity. Unless you live in an high cost housing area and intend to move to a lower cost housing area, the equity is not a factor.

**tripods68** · 07-29-2008, 01:42 PM

I list my home as both asset and liability. But the housing plummeting value took all potential equity down to negative territory; thus, our net worth is closer to zero if we are to sell it today which includes commissions and closing cost. But this tends to under inflate our retirement accounts as well assuming we don't leverage at all, which should go up every year. So I put in zero liability/asset on net worth for housing since we don't intend to sell it anyway. If that make sense to you.

I would think someone who 'brags' about the net worth got too much time on their hand.

**scfr** · 07-29-2008, 04:03 PM

I don't think of net worth as something to brag about. Mine is discussed only on a "need to know" basis. Only my husband and I know our exact net worth. The attorney who drew up our will has a ballpark idea, and when we consult a CFP s/he is told.

Monkeymama put it perfectly ... It is a tool to track progress. (And as Like2Plan mentioned, it is also important to know if your net worth will cause estate taxes to be an issue.)

I'm in the "net worth and retirement savings are NOT the same thing" camp.

**Snave** · 07-29-2008, 04:25 PM

Originally posted by scfr View Post

I'm in the "net worth and retirement savings are NOT the same thing" camp.

Agreed. However, hopefully for most working people your retirement savings make up a big portion of your net as oppossed to your homes. There are a lot of people that only have home equity that makes up their net worth. Unless you plan to sell and rent when you retire, then you are in a lot of trouble.

**disneysteve** · 07-29-2008, 04:41 PM

Originally posted by JinCO View Post

I currently have my home listed as an asset in my net worth analysis and my mortgage and heloc listed as a liability. Do most people exclude equity in their primary residence from their net worth calculation?

We've had this discussion before. The answer is it depends.

When I calculate what I commonly call my net worth, I include only liquid assets: cash, savings, bonds, CDs, stocks and mutual funds. I don't include the value of our cars, furniture, jewelry, collectibles, etc. I also don't include the equity in our home. Why? Because, as others have said, I'm doing it primarily to track progress toward retirement. The value of all those other things doesn't matter. I can't spend my sofa's value unless I'm prepared to sit on the floor. I can't spend my home's value unless I plan to live in the minivan. Whether my home is worth 100K or 1 million doesn't matter to retirement planning unless we are prepared to sell it or borrow against it's value somehow, and we are not.

A true net worth statement, though, would include the value of absolutely everything you own, including your house.

**cptacek** · 07-29-2008, 06:06 PM

I agree with some of the above posters. It is a snap shot of your entire financial picture. And whether you decide to include your house or not, or include your cars or not, etc., what is important is that you figure it the same way every time you do it and you make realistic assumptions about what the stuff is worth when you put it down as an asset.

When we do a financial statement for the bank, we have to say "we have this many breeding cows we will keep and this many calves to sell in January and this much wheat to sell and this many bales and this many vehicles and this type of tractor and this much land that is worth this much and this much in the bank and this much debt" etc. The only hard number there is what is in the bank and what debt you have. The rest are just estimates. So you have to go by market value at the time, even if you aren't going to sell the things for 6 months. But it does give you the snapshot of where you are and if you are going in the right direction.

Why is knowing your net worth important?