To calculate your net worth the basic idea is that you add up all of your assets (bank, investment, and retirement accounts, house value, etc.) and subtract your debts (credit cards, student loans, mortgage, loans, etc) to figure out how much you’re worth overall. But is that the right thing to track?
So I finally did this the other week, mostly for giggles since I had not looked at the “big picture” recently. The good news was that my total net worth was higher than I expected, mostly driven by an nice increase in my house value. The bad news I realized was that most of that value was not easily accessible (again because it was mostly driven by my house value in combination with retirement accounts). Unless I’m looking to sell the house or suddenly become more than 30 years older most of this value does not do me any good in the near future, especially if I’m trying to get to a level of financial independence.
Rethinking the Net Worth Calculation
I’m beginning to think it makes sense to create two “net” calculations, one that’s a “net now” versus a “net future”. Basically I only want to look at my current bills along with investments and savings in non-retirement accounts while not loosing sight of retirement savings.
I read the other day that you should track to having 3 times your annual salary saved in retirement accounts by the time you turn 40. I have a few years and some catching up to do on that number. A story for a different day.
The next step is to find the right calculation for “net now”. What should be included and this gets tricky because of long term debts like mortgages.