Stop obsessing over net worth
Net worth is one of the most widely used metrics to report financial progress. This calculation is commonly used in part because it’s a simple and easy metric to understand and apply:
Net worth = total assets – total liabilities.
I recently wrote about the general merits of net worth calculations here – it’s one of the things I think many prospective savers should do before they consider investing.
Your net worth value will provide you with an indicator of your financial situation. High net worth means your assets far exceed liabilities; that’s a great thing. Low or negative net worth means you owe significant amounts of debt; not desirable.
Monitoring your net worth from time to time, over time, will provide you with a general indicator if you’re trending in the right direction but it may not provide you with all the information you need to fund your financial future.
Which brings me to this: stop the obsession with net worth.
A house worth $1.5 million in central Vancouver while very nice is a small consolation prize if you owe $900,000 on that house and have $0 invested in your late-40s with no workplace pension to fund retirement. (I suppose you could move though). A house can be a home but it’s also a place to live after all. Including house assets as part your net worth, while technically correct, is misleading because it says little about the prospects of long term financial success including anything you have saved for retirement.
The same can be said about ignoring the tax consequences related to investments, and excluding those calculations in your net worth – it’s misleading. You can’t possibly do an accurate net worth calculation without knowing the present value of all assets and liabilities.
You don’t own all the assets inside your RRSP. This is a tax-deferred account which I prefer to call the TDRA for that reason. The government will want their loan back at some point.
I think quick net worth calculations are nice and fun to do every now and then but they don’t give you the full picture. If you’re tracking net worth for general purposes – fine and by all means keep doing it – especially if it helps you. Just don’t obsess over it.
I agree. A net worth is totally a vanity metric. And it’s even a larger vanity metric for those who consistently publish them for the world to see!
However, it’s good to take stock b/c it’s good to know where your money is allocated. Things are all good b/c of the bull market. But what if things turn bad?
I have considered posting net worth updates, I used to, but I don’t anymore because I don’t care about it very much. Sure, NW is important but I need cash to live from and I’d rather track and report my progress on that.
Great to hear from you Sam. Been a fan of your site for a long time.
Mark, I agree with what you’re saying about net worth. Tracking it periodically is Important but the type of assets (investment vs. personal residence) must be kept in context concerning your retirement goals and needs.
I think a number of us (earlier retirees) have the similar ideas on drawing down RRSP’s to some extent prior to govt pensions or possibly also those with delayed work pensions. Everyone has to do their own personal calculations considering a multitude of issues on what is right for them. I make multiple RRSP withdrawals at the lowest withholding rate and reconcile accordingly (owe tax money) at filing time. In my opinion the withholding rates are much too high, which might even be a strategy of the government to reduce earlier withdrawals or make use of this money until tax reconciliation time.
If one is talking about fed tax rates and the lowest bracket I think it’s safe to say the vast majority of retirees will fall into this category, and those couples both towards the higher end of this (or those able to income split) will enjoy a superior retirement to most Canadians. Using different provincial lowest brackets of course would vary the results.
Absolutely, “everyone has to do their own personal calculations considering a multitude of issues on what is right for them.”
I think the withholding taxes are insane but it’s basically the government ensuring they get their take and a deterrent for investors.
My concern would be a large tax liability upon filing that one was not expecting in respect to which bracket one thought they were in upon withdrawal from RRSP. If one can arrange one’s finances to withdraw from RRSP, stay in the lowest tax bracket upon filing (or close to it) AND live comfortably, then one might be doing just fine.
That’s actually part of our plan Lloyd. If we can, kill off RRSPs before non-reg., before TFSAs for sure, and before we accept any pension income. This way, we try and stay in the lowest bracket for as many years as possible.
Then again, a tax headache in retirement is an excellent problem to have.
North of $50K each/year.
Correct but I think you will agree that it you should be extremely concerned if you are in the lowest tax bracket when you ultimately file your tax return. 🙂
Wow, that’s great Chuck! We’re getting close to the point whereby we could withdraw from RRSPs $5k each per year and never run out (live off dividends), but that’s not very much money to live from/travel from/enjoy from in retirement. We have a ways to go to save more – and we’ll press on 🙂
Totally agree. To me, unless something is generating income/positive cash flow, it is NOT an asset. This is why we exclude our principal residence but include our rental properties when determining our net worth.
I also agree with your comment about tax deferred accounts. My wife and I both retired in our early and mid 50s respectively. One of our strategies is to slowly start withdrawing funds from our RRSP before we get to the stage where we have to convert to RRIFs. We are trying to keep the withdrawals low enough so that we’re in a lower tax bracket but one of our challenges is the Dividend income generated within the RRSP is not that much different from the withdrawals.
For those who wonder about the tax implications of RRSP withdrawals check this out:
Plan for this tax hit well in advance because if you’re obsessing over the “gross” value of your RRSP, you’ll be in for a rude awakening.
Those are the best assets Chuck – investing wise – stuff that makes you money/positive cash flow.
Great to hear about your take on tax deferred accounts.
Congrats on the early retirement – impressive. Can I ask what your withdrawals are like? We hope to draw down ours by at least $10k each.
We also want to keep withdrawals low enough so that we’re in a lower tax bracket; whereby dividend income is favourably taxed. 🙂
I know you know this Chuck but just to clarify for those that might not be cognizant of the tax implications, the withholding tax at the time of withdrawal will likely not be the actual tax owing upon the filing of ones taxes.
“To me, unless something is generating income/positive cash flow, it is NOT an asset.”
This definition would mean shares of Berkshire Hathaway (BRK) are not an asset.
Yup. No need to be obsessed on net worth as it is never about money but financial independence.
If anyone was lucky enough to grab houses well before overheating on Vancouver and Toronto real estate market, then they should seriously consider crystallizing the gains and spread their net worth over solid stocks and ETFs.
If I have a $1.5 or $2 M home in Vancouver, I’d probably be “out” now – then invest the proceeds – then rent and do whatever I want elsewhere. i.e., not work or work on my own terms!
I track net worth rather closely – basically because it’s easy and hard NOT to do when youre an index investor and your bombarded with what all the indexes are doing whenever you open the internet.
One thing I DON’T track is portfolio performance per se (although this shows up in net worth). As you say in your article ‘tracking net worth can tell you if you are going in the right direction’. For example, when the CAN index was stinking the last year it really did feel like I was throwing good money after bad . I’d buy more CAN index to keep my balance and my net worth kept going down. This would suggest I was doing something stupid. Of course, it’s come back rather well so my net worth has increased rather dramatically in the last 6 months,
Anyway, for me having a solid investment plan that is based on goals and risk exposure is what’s important to me. Keep my head down and stick with it regardless of what my net worth is actually doing and it should all pay off in the end.
I have to admit, tracking new worth when markets are doing great is A LOT more fun! 🙂
Good to hear from you None. It did feel like good money after bad last year, but now I’m glad to have invested in CAN and US in recent years – like you. US is now at an all-time high and if the US keeps climbing, so will CAN stocks. Not good long-term as I like cheap prices!
I also believe in just keeping the head down, save, invest and then spend the rest is a very good, get wealthy eventually plan. Net worth calculations are fine but don’t obsess over them and do what you do is good – just stick with a/the plan and ignore stuff 🙂
The idea of leaving your home out of net worth calculations all together doesn’t rub me the right way, simply because there is a huge difference between having a paid off home versus having to pay an always rising rent cost. Especially when dealing with decades of retirement.
But I think when using net worth to plan retirement, as long as you do it while also forecasting expenses, then leaving it out makes sense, because you are not counting in rent.
Of course if you don’t own, you need to make sure that the rent cost is in your assumptions. You may need a much higher percentage of your income to stay in tact during retirement.
Thanks for reading. I’m not saying to exclude the home in NW calculations, just be careful how much it skews things. A home is not a retirement plan unless you live in downtown Vancouver or Toronto.
Renting is not an asset, it is an expense.
We still keep a record of all our assets and liabilities (usually $600 credit card paid off monthly) in our accounting program where we record all our expenses. I still have our vehicles recorded and depreciate them annually.
Probably look at Net Worth periodically but don’t get impressed or excited by the amount.
Get much more excited by the total income increase each year.
Geez, that’s a low credit card bill. Ours is usually >$2k per month! I don’t include our cars, although technically an asset, in our NW calculations. I just focus on the equity of my home, personal investments and workplace pensions to keep it simple.
Like my post suggests, I don’t really focus on it for many reasons. It’s an indicator, nothing more. I prefer to focus on my cash flow, that is something I know very well – now and future projections.
Obsessing over anything ain’t good. It can cause anxiety and worry and OCD. I do however update my balance sheets every week and calculate tabulate my net worth (maybe I’m OCD then?). The net number has to be taken with a certain context though, that money ain’t all available right at that moment obviously. Doing the exercise helps keep track that things are going as planned and whether my expenses are in line or not. It can show how my sector allocation is doing in my assets; for example should I change my future contributions now from conservative stocks like staples and utilities now to discretionary and industrials due to changing market fundamentals? Having weekly updates is probably overkill. If you are buying stock every week like I usually do, I think it’s a good idea to make sure you have all the numbers in your mind frequently.
At the least I recommend at least keeping track of all your expenses, debt, and assets every half year. If you aren’t buying equities very often then you can likely pass on analyzing your portfolio every week to every quarter or semester.
Totally agree with your assessment Mark. It really depends which component of your net worth is increasing. Like your example, if your net worth increase is due to housing along and you have no investment outside of housing, that’s probably not the right mix you want. It’s all about asset diversification.
It is all about diversification. I’ve learned that as an investor.
I used to solely track net worth of the financial investments, but over the past 5 years I’ve included the income generated by those investments as well. I’ve gone from focusing on “net worth” to “what it can pay me”. That is the more important number for me right now. I still have a net worth on the spread sheet but it ain’t what I cheer about when a dividend gets increased or a DRIP gets registered.
I do not include any of the real estate holdings in any of those calculations.
That’s exactly what I focus on now Lloyd: what my investments can pay me. That is the #1 most important factor for my financial freedom. I don’t include the house value in those calculations purposely.
Ya, I guess it’s kind of misnomer to say “net worth” but not include the residence. That’s why I try to be specific and say net worth of the financial investments. A person’s residence likely has a ‘worth’, ergo technically it is an asset, but as I can’t sell it without replacing it I do not consider it a financial investment so exclude it from my calculations.
Lloyd — agreed. If you sell your residence, you are forced to spend some of the proceeds on a similar asset — another form of shelter. If I sell all my shares of Coke, nothing says I have to buy shares of Pepsi; I can buy a goat farm or throw a really awesome block party with the proceeds — the “worth” is unbound, unlike with shelter. (Think of all your mortgage payments (and perpetual house payments) as paying a lifetime of rent within a set period of time, 25 years, etc.)
Beyond that, and why I’ll never include my primary residence in net worth calcs is that I cannot access the capital a) without permanently losing the utility of the asset (I can sell my shares of Coke on Monday and buy them again on Friday, probably at the same price), and more tellingly, b) if I do want to access the capital stored in my primary residence, I have to pay to do so via some kind of loan — even if I own the asset outright. Paying to use my own money doesn’t sound like an asset to me.