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Great Trick When Calculating Net Worth

There’s no question that some purchases are wiser than others. What’s tough about personal finances specifically (and life in general) is that delayed gratification is underrated. How can that tendency be overcome?

When it comes to personal finances, the best way to focus on the long term is to track your net worth. People who are serious about accumulating wealth (i.e., those who won’t do it accidentally — there are a few of those out there, actually) already have a method of calculating their net worth.

That method includes a carefully constructed formula, and I’ve already shared my thoughts on the subject. But if you really want to focus on your true, conservatively-calculated net worth, here’s a great trick: include some liabilities without adding in the value of the asset. The effect is that you immediately see the downside of purchasing large, non-appreciating “assets.” Buying expensive electronics or a new car comes right out of your net worth total with nothing to soften the blow! It’s beautiful.

If your husband or wife wants to spend that extra $5,000 to get a slightly newer/nicer car, it’s very easy to demonstrate how that permanently damages your net worth. Buying just enough vehicle for your needs becomes more attractive because even when you get 0% APR on a new one, your net worth still takes the full $30,000 hit.

I’m primarily referring to purchases on consumer items up to and including vehicles because I don’t really consider our cars to be assets. They’re objects (like so many other things) that we purchased to use. We couldn’t really sell them because they’re necessary for maintaining the quality of life that we’re used to. Not going overboard on the vehicle purchases means that there’s not really any extra cash tied up in them. By “extra cash” I’m referring to the difference between what we have and what we need. For example, if we had purchased an expensive luxury car, we could sell it, buy a cheaper one that still met our needs, and have money left over.

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This trick also simplifies net worth calculations because you don’t have to try to re-value all of your assets every month. For example, if you buy a new plasma TV for $4,000 but add its value to your assets column, each month the TV is worth less and less money because its current resale value drops over time. In order for your net worth to be as accurate as possible, each month you’d need to lower the value of the TV by some amount.

So back we go into philosophical territory. What really belongs in your net worth calculation, and what is the most accurate way to represent what you own?

Ultimately you’ll have to decide for yourself. But if your goal is to maximize your net worth by minimizing bad purchases, use this trick to keep yourself headed in the right direction.

3 comments to Great Trick When Calculating Net Worth

  • I do this when calculating mine. It’s very conservative, but I think its more realistic. I also happen to think (as most banks do) that the only assets worth a crap (excuse my French) are the highly-liquid ones – cash, securities, equities, retirement vehicles, etc. Although I have to point out that I’m being somewhat hipocritical since I do occasionally invest in real estate. If you own a business and are applying for a commercial loan, this is one way most banks will view your personal financial statement…and an adjusted net worth is calculated. Liquidity is king.

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