Personal finance experts and bloggers love talking about net worth. Many people re-calculate their net worth on a monthly basis. It’s a fun statistic in your personal finances that can give you a broad idea of what direction your finances are going. But too often it is misused, over-tracked, and over-valued.
Net Worth Misused
Using your net worth to examine your own finances is one thing. Finding things such as a long term decline or negative net worth can alert you to underlying problems that need to be fixed. However, too often, people use net worth to compare themselves to others.
There’s something in all of us that likes to be the pig at the top of the manure pile. We figure that as long as we’re keeping up with the Jones’ and have more money than the average American, we’re doing all right. And we love to ogle the net worth of the super ‘successful’ people in our society. For some reason, Google searches for PewDiePie’s net worth are through the roof. I don’t even know who PewDiePie is, but I doubt knowing his net worth will make my life any better.
The problem with trying to climb to the top of the manure pile is that you’re still in a manure pile. The rat race of chasing an ever larger net worth will only make you miserable. Instead of spending all your energy comparing your net worth, focus on building a financial plan that works for you. In a few days, Rachel Cruze is releasing her new book, “Love Your Life, Not Theirs.” If the book is as good as the title, its something we all need to read.
Net Worth Over-Tracked
Tracking net worth is useful over the long term, but can become a major distraction in the short term. Many people, and especially personal finance experts, have become obsessive-compulsive net worth trackers. These are likely the same people that check their retirement accounts daily, despite being decades away from retirement. Tracking net worth over the short term does you no good. There are too many short term fluctuations and false signals, such as temporary shifts in your investments and expenses that come at irregular intervals. An annual or bi-annual net worth checkup is sufficient.
Net Worth Over-Valued, Cash Flow Under-Valued
Net worth is over-valued because it is fickle, as discussed above, but also because a large portion of your net worth is functionally irrelevant to your day to day finances. A large part of your net worth is wrapped up in non liquid or off limit assets such as your house or retirement accounts. This is great for the future you, and it’s absolutely important to build up assets in these categories, but for now, they won’t help you meet current demands and expenses. For your current finances, analyzing cash flow is a far more useful. Maintaining a positive cash flow by cutting expenses and building a sufficient income to cover those expenses will help you now. Another word for this is budgeting. And as long as you stay out of debt, maintain a positive cash flow, keep an emergency fund, and meet your retirement savings goals, your net worth will take care of itself.
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- While I do strive to only write accurate information and dispense valuable advice, I am not a licensed financial adviser. All information is based solely on my personal experience and personal research and should be treated as such. Find out more.