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.