Net worth has become a popular way of measuring your financial success. For those of you who aren’t familiar with it, net worth is calculated with a simple formula:
Total Assets – Total Liabilities = Net Worth
Total assets include things such as cash, investments, retirement savings, house, car, jewelry, etc. Liabilities include various forms are debt such as credit card debt, mortgage, car loan, student loan, etc. Add up all forms of assets and subtract all forms of liabilities and you get your net worth.
While this is an effective calculation for a comparable financial status, it is not the ONLY thing that matters. Here is a list of some other, and in my opinion, more, important things than net worth.
Lack of Debt
Not all debt is bad debt, but surely having no debt at all is the best option. No debt means no interest payments, so you’re not paying back more than you spent on something. Not having debt means that when you have extra money, you can spend it how you want rather than use it to lower your debt.
You want to have a low debt-to-equity ratio and you want to live within your means. Having no debt means having freedom, which surely freedom is better than net worth, right?
You might have a large net worth, but if you don’t have assets that can get you through a comfortable retirement, who cares? I, for one, don’t want to spend a majority of my life working extremely hard to get to retirement and find out I am going to have to continue working because I don’t have enough money put away.
More Liquid Assets
Having a majority of your net worth tied up in something like a car or a house isn’t the best option. Cars depreciate in value very quickly, so if you had to sell it you wouldn’t even get the amount you paid or even the amount it is truly worth at the moment.
Having your money tied up in a house is tough because 1) you need a place to live, 2) home value can be very hard to pinpoint until you go to sell and 3) when you sell your house, it takes a while for everything to be settled and you to get your money.
To me the most important thing, far more important than net worth, is your happiness. Who cares how much money you have if you aren’t happy? I personally don’t care as much about my net worth as I do about having enough money to do the things I love, like going on vacation and going out to eat.
Doing things I love that cost money means less money in my bank accounts/investments and, therefore, a lower net worth. Even better than doing the things I love that cost money is doing the things with the people I love, which are often free, like going for walks with my husband and the dog or watching a movie on the couch at home. I’m a firm believe that money can’t buy happiness (but it can make things much easier!).
All this being said, building your net worth is still important. The proponents that make up the formula to net worth are all very important. You always want to work towards building your assets and you always want to work towards lowering your liabilities.
Save as much money as you can; invest your money wisely to generate greater returns; grow your retirement funds; don’t charge more than you can afford to pay off; don’t take on a mortgage that is so large you can’t continue contributing to savings each month; pay off your debt as fast as you can. This is all extremely sound advice that is beneficial on its own and simultaneously increases your net worth. Just keep in mind that there are things that are more important than net worth.
Do you think that net worth is the most important financial metric?