Reflections on Net Worth

Reflections on Net Worth

The concept of net worth is not a new one. Even when we were kids, whether or not we actually knew what we were talking about, we would repeat the net worth of celebrities or high paid athletes who had been featured in the news. These were people to be revered and that number was part of the evidence to support their status. Normally the conversation would start out with something like “Can you believe how much so-and-so is worth?!” Now, in reality, as long as the number to follow exceeded that of our month’s allowance it really didn’t matter how many zeros or commas were involved, it all sounded like a lot!

My suspicion is, for many of us, net worth is still a little bit of a mystery. Some of us might know how it is calculated and we may even have a rough idea of our own net worth over time, but it doesn’t really tell us a whole lot. So, as financial planners we thought we’d share a few thoughts on the benefits of measuring net worth, as well as the pitfalls that often accompany this practice.

The Upside of Net Worth

What are the benefits of measuring your net worth? At its most basic level, net worth provides a single number for measuring your financial progress. If your net worth over time is growing then it indicates that you are living within your means and making positive financial decisions. The real challenge that net worth attempts to overcome is to consolidate all of the various assets that a person accumulates into one number. Helpful, indeed.

The Downside of Net Worth

You’ll note this section is longer, that’s because the tool may be pretty simple but its application is what gets complicated. Nearly all of the drawbacks to measuring net worth hinge on how a person interprets or uses that measurement. Here are three of those traps we all risk falling into:

  • Status As humans we like to compare ourselves with others. And the irony is we can always find someone who makes us feel inferior or superior, regardless of our station in life. So, what the point? Your personal worth and your net worth are two very different things. And to be clear, your personal worth always exceeds your net worth.
  • Real Value: Net worth is simple: increase your debt or spend more than you’ve earned and it goes down. Do the opposite and it will go up. However, what it fails to measure is value. For example, take a loved one on a trip to share with them your values and create memories. The outcome will likely be a slight decrease in net worth. However, the value of what you’ve just done goes beyond measurement.
  • Security: We’ve likely all heard this saying from the Bible, “For what does it profit a person to gain the whole world and forfeit their soul?” Similarly, Jesus told a parable of a man who was completely consumed with amassing possessions and wealth without any purpose or understanding. Jesus criticized the man not for his wealth but for the fact that he did not use it to pursue a greater end. Don’t make that mistake, this life is temporary, be sure that you know your purpose and that it is about more than accumulating more. You possessions alone cannot make you secure or happy.

So what are our takeaways? Net worth will disappoint you if you are looking for status, real value, security, or happiness. It is a tool, and while it has limitations it also has its uses in assessing your financial well-being.

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