random musings

March 12, 2011

What does net worth really mean?

From discussion regarding the envelope system @ imperfect to a more free form method @ thrifty little blog to more meticulous techniques followed by kinless (see the nyt article) money is something that may not be quite the taboo subject anymore.

We all know that financial wealth is limited if money in - money out = small, regardless of how big the number on the left is.

And, let's face it, it is nice to see the total number at the bottom of net worth calculations increase over time.  It's an easy way to see the cumulative effect of many life choices. But what does net worth really mean?

Should you include your car or residence in calculations? From an accounting perspective, yes. But in reality, are any of us going to profit by our primary residence? Chances are we are either in our houses to stay or are looking to upgrade, which means rolling proceeds in their entirety into purchasing the next one.

I like the view taken by Spencer Sherman - take that net worth  and divide by annual money out. What does that buy you in time? Sherman even goes on to say that the retirement goal to strive for is to spend 4-6% of one's holdings annually. That makes sense, right? If the retirement nest egg stays current with inflation, under this guideline it will last 20 years. Which will take me from 65 to 85. Very reasonable.

Guess I'll be working for a long time yet....

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