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How to Define Net Worth (Free Money Finance)

Post on: 17 Июнь, 2015 No Comment

November 19, 2009

How to Define Net Worth

Here are some interesting thoughts from Stop Acting Rich. And Start Living Like A Real Millionaire on how to define net worth.

Here are the two ways he defines net worth in the book:

Augmented net worth is the traditional definition — assets minus liabilities. It includes ALL assets and ALL liabilities. Specifically, it includes the market value of your home as well as the debt for your mortgage.

Net worth as he describes it in most instances refers to investment levels. If someone has investments (such as stocks, bonds, mutual funds, equity shares in a private business, annuities, net cash value of life insurance, mortgages and credit notes held, gold and other precious metals, CDs, T-bills, savings bonds, money market funds, checking accounts, cash, and income-producing real estate — in other words, anything thats fairly liquid) of over $1 million, then hes considered a millionaire. The author goes on to say that there are less than half of these millionaires that the millionaires listed when augmented net worth is used, so its a more stringent criteria and excludes people that are house rich but not really wealthy (they way he defines wealth.)

The second definition of net worth leaves me wondering if he takes debt into consideration in any way. He doesnt mention (at least so far in the book) that the investments are net of any debt, and this is troublesome. To take it to an extreme, I could borrow $1 million, put it in investments, and he would consider me a millionaire, even though my real net worth (assets minus liabilities) was zero. This leads me to believe that he somehow does take debt into account (or maybe people with $1 million in investments simply dont have much debt), but I wish he would say so.

Personally, I think both net worth measures have value. The net worth I track for our family is augmented in that it does include the value of our home. That said, our home (with no debt on it) is less than 15% of our net worth, so its not a big deal. But I do look at liquid assets as well. Im a bit more stringent than his investment-based definition above on this one — I eliminate assets/investments in 401ks and IRAs, longer-term assets that would be hit with some sort of penalty if I was to withdraw them. Anyway, Quicken makes it pretty easy to slice and dice our financial information, so its easy to look at things several different ways to get a picture of where we stand. But in the end, what he defines as augmented net worth is the key measure I track.

How about you? How do you define/track your net worth?