Thoughts on "net worth"

One of the recent threads got me thinking about figuring one's "net worth." I can tell that I view the subject differently from most, so I thought I would post some thoughts for discussion.

Basically, if you are figuring your net worth for your own benefit, there are three ways to track it: by market value, "firesale" value, or cost basis.

Which method you use depends on the conditions under which you plan on selling.

• If you are planning on selling the items that figure into your net worth within the current market timeframe (i.e. your house under the average time it takes to sell a house in today's market), then tracking market value makes sense.
• If you are not planning on ever selling the items that figure into your net worth, then you are most likely only going to sell them in an emergency and so would track what you could get for them in a firesale. (Didn't Ben Suarez come up with this one?)
• If you are trying to maximize the profits on the items you are holding, then cost basis makes a lot of sense. After all, your profits are your proceeds minus cost. But if you are going to take this route, you should track age and turnover as well.

Under this way of thinking, you would probably track various items differently when computing your full "net worth."

It's important to pick the right method; otherwise you can set yourself up psychologically to make un-fruitful decisions -- like selling your house in a down market in order to stop "losing money" when you otherwise wouldn't have sold.

Now, things are different if you are calculating net worth for tax purposes or as a basis for a business deal. In those cases, you pretty much have to follow a standard formula.

Just some thoughts.

-Phil


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