Why Your Net Worth Isn’t Worth $#!T – 3 Metrics You Should Pay Attention To

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3 Metrics you should pay attention to

Do you track your net worth?

The other day I received a letter from my bank asking me to give an update on my current financial situation.  Since I have a mortgage with them, and a decent size one at that, they want to make sure my financial situation is well under control.

I can’t blame them for wanting to know, after all that is the business they are in, even though I found it a bit annoying.

In the end what they really wanted to know is my net worth, just incase I wouldn’t be able to make my payment for some odd reason and have the assets to back things up.

So I ran a few numbers and came up with this.

 Liabilities

  • Mortgage – $191,344
  • Credit Cards – $3000

Assets

  • Property Value – $245,500
  • Cash – $5210
  • Vehicles – $8,000
  • Retirement $50,000
  • Misc. Assets – $5,000

Total Assets:  $313,710

Total Liabilities:  $194,344

My Total Net Worth:  $119,366

Why Your Net Worth Isn’t Worth $#!T

Those numbers look pretty impressive don’t they.  However, I’m not showing these numbers to brag or prove something to someone, but rather to point out that your net worth is almost completely meaningless.

Yup that’s right, meaningless.

Now I’m not saying this to upset anyone.  I know a few people who do track their net worth and that’s great but to me that number is nothing more than a vanity number.

Don’t get me wrong I like that I have such a great net worth but what does it really do for me.  It looks great on paper but it doesn’t  even come close to telling the whole story.

In fact if you read one of my recent  articles  I mentioned that I only came out ahead by a $245 in the month of May.  Now you would think that with almost a $120,000 of assets I would be doing awesome but nothing could be further from the truth.

I”m still stuck in the paycheck to paycheck trap for the most part and just getting byand I don’t usually have much when it comes to the end of the month.

However when you look at my net worth it makes me look like my financial situation is doing just fine, when it really isn’t.

So in this article I thought would share a few metrics that I track and pay attention to.

3 Metrics You Should Pay Attention To

Income.  The first metric I pay attention to is how much money I make in a given month.   This will tell me if my income is going up, going down, or just staying the same.

To do this I base my current months budget on last month budget.  This will typically give me the most accurate numbers as to how much I am earning and spending from one month to the next.

I usually manage all of this through my Mint.com account.   To do this log into your Mint account and click on the Trends Tab.  Then click on income over time in the left hand column and then select Last Months in the upper right hand corner.  (Look at the picture below to help you out.)

Income

What’s great about this page is that it will tell me what my average income over the entire month.

Income_for_May_2

This might sound pretty basic but do you know how much make from month to month?   Knowing this number allows you to allocate your spending to the correct categories.

 

Spending.  The next metric I look at is spending and I do this by just clicking on Spending Over Time and then selecting Last Month under the Trends Tab.  (Look at the picture below to help you out.)

spending_

From here you will see exactly how much money you spent over the month.

Spending_In_May_2

Again this is pretty basic stuff but do you know exactly how much you are spending every month?

 

Net Income.  From here we need to look at the last and most important metric, our net income, or basicly the amount of money left at the end of the month.

This number is basicly subtracting your total income over your total spending and seeing exactly what we have at the end of the month.  You can check this number out by going to Trends Tab again, clicking on Net Worth Over Time, and selecting Last Month.  (Look at the picture below to help you out.)

net_income

 

In the picture below you will see a chart like I have below.  The number I have circled below is how much I have left at the end of my May 2014 budget, $245.11

net_income_2

From here I like to track this specific number and see if it’s going up, down, or staying the same.  What’s also great is that this number will let me know if my finances are improving.

The higher my net income is the more I can save, and the better off I will be.  So what is your net income at the end of the month?

What Metrics Do You Track?

Wrapping up,  I like tracking the three metrics I mentioned above because it is a direct reflection of how well I am doing with my finances.

More than that I’m not lying to myself with false vanity metrics and the last thing I want to do is fool myself into thinking my finances are doing really good when they are really not.

What metrics do you track when it comes to your finances?  Share your thoughts and comments below.

13 thoughts on “Why Your Net Worth Isn’t Worth $#!T – 3 Metrics You Should Pay Attention To

  1. Hey, Chris, great article. We’re also in a situation where our net worth is a nice number but we’re living paycheck to paycheck, so I totally agree with you. The main metrics we’ve been tracking in the last year and a half are: our spending, because as you pointed out, you need to know where your money is going, and also our DTI. If we can keep track of/lower our DTI, we can put ourselves in a position to increase our net worth.

    1. Thanks Laurie. I’m glad you liked the article. That’s awesome that you are tracking your spending very closely. I’ve noticed when I don’t pay much attention to my finances things get out of hand pretty quick but if I watch what I’m spending and look for ways to cut cost I seem to do fairly well. It just goes to show that just paying attention to your money will actually save you big time.

      However, I’m curious why do you track your Debt To Income Ratio so closely? I’m not saying this because it’s bad or anything but rather the only reason I’ve really ever paid attention to that metric was because I was planning to buy something and your DTI is often times taken in considerations before you can get a loan.

      Thanks for sharing your thoughts Laurie.

  2. I think both balance sheets and income statements are important to understand a complete picture of one’s finances. But the three metrics – income, spending, and net income – are more tangible to deal with everyday life because a house can’t be spent, but savings can :) A couple of numbers I also like to track are cash flow and debt to equity ratio.

    1. That’s awesome Liquid. When it comes down to it you can track a million things. For example, I thought about tracking things like savings, or how big my emergency fund gets, but when you think about it if I don’t have enough income, my spending is to high every month, and my net income is in the red, then I won’t be able to save any money or improve my financial situation without a positive cash flow situation.

      Thanks for sharing your thoughts.

  3. I think the issue here is not that net worth is meaningless but that it doesn’t accurately reflect your cash flow which seems to be what you want. However, they’re two very different things and thus serve two different functions. Your cash flow doesn’t tell the whole story but obviously, you don’t find that number meaningless. Similarly, your net worth doesn’t tell the whole story but that doesn’t make it meaningless.

    Ultimately it comes down to context. You say that your financial situation isn’t doing well — I would say your net worth accurately reflects that when you consider what goes into it. Basically, if you own a home, you should have a really high net worth unless you have a lot of debt. Or, I guess if you own a super-cheap home which isn’t the case here. So I don’t think that the $120,000 net worth looks as impressive as you may think it looks because it (accurately) implies you have a lot of debt. I don’t say that to insult you but to agree with you — it can be a misleading number, but hopefully it only misleads people who aren’t familiar with your financial situation. Thankfully, because you are familiar with your financial situation, you don’t look at that number and think everything is great.

    I would encourage you to continue to track your net worth. It provides a good snapshot of your financial health. Currently, your net worth is just over $119,000. Check it again in six months. Is it higher or lower? How much higher or lower? It’s a very helpful way to determine not only if you have positive cashflow over a period of time, but how your assets and investments are faring over that same period. If you have a positive monthly cash flow for the next six months but your home value and your retirement funds tank, you’ll be in trouble. However, if you only look at your monthly cash flow, you may think that you’re doing really well.

    Your net worth can also help you assess your finances and identify problem areas. Just by looking at it now, I can see that you have a lot of debt and that you don’t have enough liquid assets. However, your retirement account looks to be in good shape — that is, unless you’re 60 years old :P.

    Lastly, tracking your net worth can also help you make choices for estate planning. Depending on your family and dependent situation, your net worth can help you determine how to divvy up your estate.

    I agree that alone and out of context, your net worth doesn’t mean much. But I’d say it’s far from meaningless and when studied within the context of your assets and liabilities, and used in conjunction with other financial tools, your net worth can help you accurately gauge your financial health.

    1. Hi Ruser, first off I want to say thanks for the awesome comment. I really appreciate the perspective you’ve brought to the table. Honestly, I don’t think my net worth is completely worthless I just feel it’s one of those metrics a lot of people use to define their financial perspective and it may not be showing them everything that is really going on.

      On the other hand I like how your track your net worth over longer periods of time to see if things are improving or not. I’ve never looked at net worth in this way, and your perspective has definitely given me something to think about.

      I will also be tracking this but only every 6 months like you said to see if things improve, get worse, or stay the same. What’s great is I can track this all in Mint so that makes things fairly easy for my to do ;)

      Finally, just let me say that I’m nowhere perfect at managing my finances yet and I think that the great thing about all of this is that there is always something to learn. So thanks for sharing your insight Ruser.

  4. Good article Chris. The problem with tracking property value is it can fluctuate so wildly from year to year here in England (where I live). It is a terrible metric to track.

    Keeping an eye on how much you are spending is the most definitely important part of managing your finances. I think managing money should be taught in high school.

    1. Hi Brendan, I totally agree. Property value as part of your net worth is hard to track. Just because someone appraises my house at a certain amount doesn’t mean someone will pay that amount for it. If the economy is doing great people might pay more but if the economy isn’t doing great they my not even pay anywhere near the appraised value.

      I also agree money management should be a required class in every high school. When it comes down to it so many people grow up with the wrong ideas about money and how to handle it. I saw this a lot when I worked in financial services.

      Thanks for the awesome comment Brendan.

  5. I totally agree with your article. Our net worth is very deceiving when you look at our daily cash flow struggles. We own a couple of rental units which boosts our net worth, but that’s not helpful if they sit empty for a couple of months or if we get a bad tenant. Also, we built a custom home where we did a lot of the work ourselves, resulting in a lot of equity in the home immediately once it was built….the punchline is, we can’t take advantage of the equity because with our income we wouldn’t be able to afford the mortgage payments on it if it was fully mortgaged. Again, that makes our net worth look awesome, but it’s no benefit to us at all.

    In fact, reading your article gave me an opportunity to laugh at myself because I keep track of our net worth on a regular basis, but what for? I’m not sure….probably just keeps the panic at bay when the cash flow gets tricky. LOL.

    1. It’s like you were reading my mind Tania when I was writing that article. I did a lot of the same things as well, tracking my net worth but then I realized what is the real point of it when my cash flow is not doing so well. I might as well just lie to myself and pretend things are alright because that’s what I would be doing.

      Rather I prefer to look at the hard data. If I notice that my net income is shrinking then I know I have a spending or income problem that I need to fix fast. If I were to be looking at my net worth alone I might not discover that problem for another 6 months.

      Thanks for your thoughts I really appreciate it.

  6. Such a good topic Chris! I think me and my hubs should pay attention to our net worth. I’m just wondering, my hubs made a good income every month, but we’re still living paycheck to paycheck. I told him that we need to track not only our expenses, but also our incomes, so that we should know how to balance everything.

    1. Good point Marie, your income is a very vital part to your finances and you can’t improve what you don’t know. Thanks for stopping by and sharing your thoughts.

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