Sunday, April 15

Measuring Net Worth – advantages and limitations

WELCOME! This article is my submission to the Canadian Tour of Personal Finance Blogs.

When I discovered the world of personal finance blogging, I was absolutely delighted to find a place where people could talk about actual numbers freely. I still find it very exciting that so many PF bloggers post their net worth, budget, debt and other numbers so that we can all gain a greater understanding of money than can be found in the single case of just your own situation.

I have tracked my net worth with various levels of accuracy for many years now, but this year I am starting to realize that this number is not to single key to success that I once thought it was. Ironically it is my success with increasing my net worth that has led to this realization.

My retirement planning has always consisted of spreadsheets that model income and expenses based on fixed assumptions. During the accumulation phase, my net worth would rise and during the retirement phase it would decline. But this past year, as my net worth passed half a million, I suddenly realized that while I have learned many things about accumulating, I have no clue about how to make the declining phase work.

Regular readers of this blog will recognize a theme that I have been moving toward for a while now. To retire, you need income. Net worth doesn’t pay the bills every month.

So although the time I spent focusing on net worth has been productive, I know that the time is now right to change this focus. I need to start developing a strategy for income and adding new measurements that will allow me to track it. I also have to determine what my goals are for this new stage.

To those who are on a different point in their financial journey, I would suggest that if you are early in your accumulation phase then net worth may indeed be the best number to focus on. But once you have some basics in place it may be better to address the income question sooner rather than later. I am beginning to suspect that I may have unnecessarily delayed my financial freedom date by coming to this issue so late.

If you have come here as part of the Canadian Tour of Personal Finance Blogs, thanks for visiting. I wish you every success in your own journey!

5 comments:

Canadian Money said...

Good to see your participating in the tour.

Carrying on with your line of thought...it may make sense to say that our net worth will be there to generate cash flow. As I recall, a conservative "forever sustainable" withdrawal rate is about 4 percent per year. At 4 percent, one million of net worth will generate $40,000 per year.

I would first subtract the value of one's home from net worth, then see what the remainder of net worth will generate.

the money diva said...

CM,

You are correct that net worth can be withdrawn to create income, but if it is not in income producing investments then selling it is the only way to get cash out. I'm starting to realize that the mechanics of turning growth investments into income investments may be difficult due to lack of preparation to make decisions, tax issues or other things that I might not even know about. So, I should really say that I am interested in determining the best way to generate cash flow.

Thanks for visiting the tour!
MD

Monty Loree said...

Hey Money Diva,
Thanks for participating in the Canadian Tour of Personal Finance blogs.

Did you find the process valuable?

Would you get involved in another Tour down the road?

I did enjoy your post. I always enjoy reading from somebody who has that experience.

Thanks again,

Customers Revenge said...

I'm with Canadian Money . . . take your home out of your net worth calculation.

I took a look at your "Net Worth IQ" and am wondering how you grew from 100K to over 600 in about 3-4 years. That's amazing, or do you live in Calgary?

the money diva said...

CR,
You raise two very interesting points that both require longer responses. I have addressed the question of home in net worth in today's post and I will look at the other question later this week.
Thanks for visiting!
MD