Hopefully, as time goes on, your net worth will increase. However, monitoring your liquid net worth may not be the best way to track your financial progress. This is because savings for a real-estate purchase or other large ticket items can skew the picture. Is it really fair to include savings in your net worth when it may already be “spoken for?” If you buy a $30,000 car, it’s true that you own the asset, but it’s a depreciating asset, and when you retire, it won’t translate into an equivalent amount of cash to pay your retirement bills. If you’re saving to pay for your children’s apartments, unless you own the title deed on the apartment and are willing to evict your grandchildren if your own cash-flow needs dictate selling the property, those funds shouldn’t be counted towards your retirement nest egg.
A better way to think of household expenses
Merely focusing on your net worth can distract from a main goal of financial planning: creating a secure retirement. Companies monitor their fiscal well-being by analyzing different statistics (such earnings growth and debt ratio) because they realize that numbers don’t stay the same. In fact, sometimes the amount they move isn’t as important as the fact they move in tandem or away from other figures. Therefore, consider thinking of your household expenses as ratios.
A mortgage-to-income ratio can let you know if your mortgage payments are jeopardizing your retirement savings; an investment ratio can suggest how much of your portfolio should be invested in stocks or bonds; an education-to-average-income ratio can let you know if your tuition payments will pay off in terms of higher income down the line, or if you are paying too much for degree that has little earning potential.
Ratios change over time, and that is fine, as long as the direction of movement corresponds to your financial plan and personal goals. While monitoring net worth is helpful, keeping everything in proportion may be even better. And remember, the funds that are truly measurable are the ones given away to charity. Those are the investments that may never bring a financial return, but will certainly pay off in other ways.
Douglas Goldstein, CFP®, is the director of Profile Investment Services, Ltd. www.profile-financial.com. He is a licensed financial professional both in the U.S. and Israel. Call (02) 624-2788 for a consultation on how to set up your American assets to meet your financial goals. Securities offered through Portfolio Resources Group, Inc. Member FINRA, SIPC, MSRB, FSI. The opinions expressed are those of the author and not those of Portfolio Resources Group, Inc. or its affiliates. Neither PRG nor its affiliates give tax or legal advice.
Published April 9, 2012. Updated May 2023