Earlier today I described net worth, and asked if it were the most important number in personal finance. Many people believe that it is. For them, it acts as a motivator, a sort of “life scorecard”. For others — and I’m one of them — net worth is just another number.
As I do my finances, Quicken computes my net worth, but it seems largely irrelevant to me. I don’t even know what the number is at the moment. (I’d have to open Quicken to check.) There are two main reasons I don’t track my net worth more closely:
- I’ve never figured out how to calculate my net worth in a meaningful way.
- There are other numbers that are more useful to me.
I recognize that net worth is an important part of my personal finance toolbox, but to me, it’s just one tool of many.
If I find net worth inadequate, then what numbers are important to me?
Compared to these four numbers — numbers that measure my immediate needs and goals — net worth seems secondary.
- When I was in debt, the only number that mattered was the amount I owed. That kept me focused on the task at hand. (And even when I was in debt, my net worth was positive, so that wouldn’t have been a good motivator.)
- Now that I’m out of debt, the number that matters most is my savings account balance. (It’s getting close to my $10,000 goal!)
- Once I finally have enough tucked away for emergencies, I’ll focus on my retirement savings. You can be sure that’ll be a big topic around here in 2009. (We can all try to determine our Magic Numbers!)
- Our mortgage balance is also important to me. Kris and I have our own mortgage acceleration plan in place, and we like watching the balance drop. (It’ll fall below $210,000 this month.)
I agree with JD on this. I typically focus on maximizing my retirement account contributions, minimizing debt levels, maintaining a positive cash flow, and targeting a specific figure for monthly charitable giving and month savings. I gave myself free reign to have fun with whatever is left over. Of course, I've had to tighten my belt significantly since coming back to school, but the principle is sound.
Many of the figures JD and I pay attention to can tell you far more about your overall financial wealth than solely focusing on net worth can. It can also lead to an unhealthy obsession with focusing only on your bottom line. I've seen a lot of friends get into deep financial trouble because they fixated on growing their net worth as quickly as possible while ignoring other fundamentals.
If I had only focused solely on my net worth, I probably would have never traveled like I have and would not have decided to come back to school. Money is a wonderful tool for accomplishing your goals, but can be a terrible master. People and organizations tend to perform based on whatever metric they evaluate themselves by. Be careful with what you choose.