The Fluctuating And Gameable Net Worth Number

In the financial independence community, net worth means everything – or if not everything, it means a lot. When I started this blog five years ago, I actually went into it intending to regularly track and share my net worth each quarter. I ended up writing two quarterly net worth posts before I ultimately shelved the entire exercise (you can read them here and here if you’re so inclined). 

The problem for me is that I’ve never really been someone that tracks my net worth. I use Mint and Personal Capital to track my finances and investments, so I always have a general sense of my net worth, but I don’t really track it monthly or quarterly as some people do.

The reason for this isn’t that I think net worth isn’t an important thing to know. It gives a nice, generalized barometer of how you’re doing financially. With enough data and time, you can get a decent sense of where you’re headed. Ideally, you want to see things moving in an upward, positive trajectory. 

The thing is, I’m not really sure how important knowing your actual net worth is. To me, net worth has always felt like more of a vanity exercise, a way to compare yourself to someone else based on a number. We’re all human. And if there’s one thing I know people like doing, it’s trying to rank and compare things that really can’t be compared easily (see things like the US News school rankings, Forbes lists, Vault 100 law firm ranking lists, etc). 

Here’s the interesting thing. As simple as you’d think calculating your net worth would be, it’s actually not quite so simple. There’s no clear consensus on what you’re supposed to include or not include. In many ways, it’s our decision about what to include or not that determines our net worth. Include fewer things and your net worth will be lower. Include more things, and your net worth will be higher. I feel like it lends more credence to my belief that net worth is often more about making us feel good.

My Net Worth – What Do You Include And What Don’t You Include? 

The basic definition of net worth is simple – to get your net worth, take your assets and subtract your liabilities. What’s left is your net worth. The problem is, most people (myself included) aren’t really sure what counts as an asset. 

We can take a look at my net worth to get a sense of how your net worth can fluctuate pretty dramatically depending on how you look at it. 

In the financial independence community, it often seems like most people view their net worth as consisting of their cash and investments (in both taxable and tax-advantaged accounts). When I was writing this post, coincidentally, my friend Money Wizard also happened to write a post about why he doesn’t include his house in his net worth (and I swear I started writing this post before he published his post, so it was a coincidence that we both happened to write about net worth stuff at the same time).

When you include my cash and equity investments, minus the student loans my wife still has, we end up with a net worth of around $500,000. I’m 34 years old, and while I’m not as far ahead as many people in the financial independence community, I’m obviously better than most people.

That’s the most basic look at my net worth. But it leaves out a lot of assets I do own. Houses. Furniture. A car. Bikes. Businesses. These are all things that go on the asset side of the balance sheet because they do have monetary value. And if you add these things into the equation, my net worth can change dramatically.

Do You Include Houses In Your Net Worth?

I recently bought a new house. It’s an expensive house too – in the million-dollar range. My wife and I have a combined household income that makes it possible for us to afford a house like this, but we know it’s a lot of money to put into anything and it could very well be a huge mistake (we don’t know the future, so anything we do can only take into account what we know now and what we guess the future will hold). 

Buying this house meant we needed to put down about $200,000 for our downpayment. We’ve had this cash saved up for several years and it was something that we would have likely considered as part of our net worth if I had been tracking it. After all, we didn’t need to buy a house, so that money was always there for us to use however we saw fit. 

The question now is, after buying our house, what happened to our $200,000? Is it gone? You could argue we spent it, but that’s not exactly right. We bought a house. It’s not like we bought tickets to Disney Land. The money might not be easily accessed and we might not be able to get all of it back, but we could get at least some of it back if we wanted. 

We also have our old house that we’re converting into a rental property. We lived in this house for 5 years and owned it for 11 years. It’s built up a lot of equity in that time. Conservatively, it has at least $150,000 in equity. More likely, it’s closer to $200,000 of equity. Most people would agree that rental property is different compared to your primary residence. So, after converting it into a rental property, do we now count the equity we’ve built up in that property?

If you include these two properties into the equation, suddenly, my net worth jumps from $500,000 to $850,000. That’s a pretty big jump without doing anything.

Do You Include Businesses In Your Net Worth?

Including the equity of a rental property in your net worth is essentially like including a business in your net worth. That leads me to another question – how do you think about businesses when it comes to your net worth? 

This is a real question for my family. My wife owns her own practice and I own this blog. Both of these are real assets – they require work and they generate income that accounts for almost all of our household income. Most people wouldn’t include these sorts of businesses into their net worth. But why not? They’re real assets with real value. When we look at the net worth of the world’s richest people, almost all of it comes in the form of business equity.

My blog was built on sweat equity, so I don’t have any direct money tied up in it. And while it probably wouldn’t sell as easily as other businesses, it could likely be sold to someone for some amount of money. 

Meanwhile, my wife bought her practice from a retiring dentist for a significant amount of money. She took out a 10-year loan to purchase the practice and is now 7 years away from paying it off. Because it’s a relatively short loan, it means she’s built up a decent amount of equity into her practice. She also has associate dentists that may want to buy into her practice one day. The practice has a real value that can be sold – and indeed, part of it may be sold one day if she takes on partners.

So should we count this in our net worth? 

So Am I A Millionaire? 

If you add in the value of our businesses, our household net worth jumps to over a million dollars. This is based on a simple calculation of what our assets are worth minus our liabilities. That’s a pretty big jump – going from half a million to a million just by including a few extra things. 

So am I a millionaire at 34 years old? I’m not really sure. If you asked me, I’d say I’m not. At our current savings pace, I think we’ll get to “real” millionaire status by our early 40s. And this is without doing a lot – just earning a good income and putting as much money as we can into our retirement accounts.  

But you can see what I mean about net worth and how it can be gamed to suit whatever you want it to say about yourself. I like to play it safe on the net worth front, so I usually only count my cash and my investments. Often, I don’t even count my cash when thinking about my net worth since I think of my cash as something I might spend soon. But if I’m feeling bad about myself, I can always say I’m a millionaire too just by counting other things that are more on the fence.

What’s Your Net Worth – You Can Decide  

After writing this post, I see a few ways you can think about your net worth. These range from a more conservative view of net worth to a more aggressive view.  

• Conservative. Only include immediately accessible assets. These include cash and taxable accounts. I think very few people will opt to think of their net worth in this manner, but if you do think of it this way, you’re going to feel broke, but you’ll also probably end up with more money than you know what to do with.
• Normal. Include all cash and investment accounts. I think this is how most people think of their net worth. They include their cash plus all taxable and tax-advantaged accounts. This is how I generally think of my net worth when I’m thinking about how I’m doing financially.
• Normal + Real Estate. If you want to inflate your net worth a little bit or want to feel a little better, include the equity you have in your real estate. You can get a general sense of what your home is worth from Zillow. As you can see from my own net worth, if you include these numbers, your net worth can jump dramatically. If you want to be more conservative in this area, maybe you only include the downpayment you put on your house. After all, that’s real money that was part of your net worth and didn’t just disappear.
• Normal + Real Estate + Businesses. If you really want to push your net worth higher, go ahead and add your businesses. Some businesses are more liquid than others. Brick and mortar businesses likely have inherent value. A website that generates income should have some value too. If you add your businesses into your net worth, you’ll probably feel really good about yourself.

If you’re feeling really bad about yourself after adding all of these things, go ahead and add the value of your cars, bikes, furniture, and everything else you have in your house. These are things with real value too. You probably even have insurance for them in the form of home insurance or renters insurance.

The point is, there are a lot of ways to think about net worth, and depending on what you decide to count or not count, your net worth can feel really low or really high. I didn’t even realize that I could technically be considered a millionaire until I wrote this post. 

I want to be more conservative, so I go with the “normal” approach to net worth, which is counting my cash plus my investments. That means I still have a long way to go, which is fine with me. But if I want to feel good about myself, I can always add in my real estate and businesses. That’s the thing about net worth, I think. It’s really up to you to decide what it is.