Comments on: Your Total Measure of Wealth: Age and Net Worth http://www.punny.org/money/your-total-measure-of-wealth-age-and-net-worth/ Adding a punchline to your bottom line Fri, 21 Nov 2008 11:26:06 +0000 http://wordpress.org/?v=2.6.2 By: Myself http://www.punny.org/money/your-total-measure-of-wealth-age-and-net-worth/#comment-108932 Myself Tue, 30 Oct 2007 19:53:25 +0000 http://www.punny.org/money/your-total-measure-of-wealth-age-and-net-worth/#comment-108932 Personally, I perceive Net Worth as an ongoing analysis on one's financial status. Net worth is <i>always</i> an snapshot of one moment in time. If your networth is going up over time, then you are financially better off. If it is going down or almost non-changing, then you are just spinning your wheels. This is one reason why a 15 year mortgage (or even shorter if possible) is quite beneficial to you, in comparison to a 30 year (or gasp 40 year) mortgage. But don't forget that the rate of change for either one of these will have a tendency to go up, as long as the mortgage is paid when it is due. Please don't think that getting a 30 year mortgage means that you're an idiot either. You have to examine how the monthly payments affect your cash flow. I kind of equate the concept of cash flow with net worth. Why? Because they both change over time. In order to increase your net worth, you usually (but not always) have to increase your cash flow - as long as it is a positive cash flow of course. Personally, I perceive Net Worth as an ongoing analysis on one’s financial status.
Net worth is always an snapshot of one moment in time.

If your networth is going up over time, then you are financially better off. If it is going down or almost non-changing, then you are just spinning your wheels.

This is one reason why a 15 year mortgage (or even shorter if possible) is quite beneficial to you, in comparison to a 30 year (or gasp 40 year) mortgage. But don’t forget that the rate of change for either one of these will have a tendency to go up, as long as the mortgage is paid when it is due. Please don’t think that getting a 30 year mortgage means that you’re an idiot either. You have to examine how the monthly payments affect your cash flow.

I kind of equate the concept of cash flow with net worth. Why? Because they both change over time. In order to increase your net worth, you usually (but not always) have to increase your cash flow - as long as it is a positive cash flow of course.

]]> By: Nick http://www.punny.org/money/your-total-measure-of-wealth-age-and-net-worth/#comment-52323 Nick Thu, 22 Mar 2007 03:43:07 +0000 http://www.punny.org/money/your-total-measure-of-wealth-age-and-net-worth/#comment-52323 broknowrchlatr (heh, nice name), 1. I would still include those periods when you were still in college or otherwise not yet employed at your current level because those years will have a more dramatic impact on your net worth the more recent they are. For example, since I'm 24, I will look back to my first year of college. Since I'm still pretty young and I've only been professionally employed for about three years, I wouldn't be expected to have as high of a long-term net worth growth rate as when I'm 30 looking back at ages 20-29. When I'm 30, those college years will have less impact on my growth calculation, but the fact that two of the years are still included reflects that I'm still relatively young. 2. Your formula seems to reflect a compounding annualized growth rate. Mine just divides the growth evenly across the years. We figure in the effects of compounding later on in your rate of return. (Plus if I had put exponents in this early, I'd have scared off a lot of folks! :) ) 3. Even in the slower years of the economy, it's not a bad idea to try to maintain the same net worth growth rate. I mean, I totally understand if the stock market crashes and your net worth takes a bit of a hit as a result; but just because the S&P grew <i>only</i> 10% instead of 15%, I don't see that as enough of an excuse for why <i>my</i> net worth only grew by 10% instead of 15%. Looking at it another way, I wouldn't want to fall into the trap of using external factors as an excuse for my net worth performance. But I see what you're saying, and I agree that there are definitely cases where your net worth will fluctuate from year to year. That's why looking at your long-term growth is so important: it takes care of those "bad years" by also including the "good" ones in your calculations. broknowrchlatr (heh, nice name),

1. I would still include those periods when you were still in college or otherwise not yet employed at your current level because those years will have a more dramatic impact on your net worth the more recent they are. For example, since I’m 24, I will look back to my first year of college. Since I’m still pretty young and I’ve only been professionally employed for about three years, I wouldn’t be expected to have as high of a long-term net worth growth rate as when I’m 30 looking back at ages 20-29. When I’m 30, those college years will have less impact on my growth calculation, but the fact that two of the years are still included reflects that I’m still relatively young.

2. Your formula seems to reflect a compounding annualized growth rate. Mine just divides the growth evenly across the years. We figure in the effects of compounding later on in your rate of return. (Plus if I had put exponents in this early, I’d have scared off a lot of folks! :) )

3. Even in the slower years of the economy, it’s not a bad idea to try to maintain the same net worth growth rate. I mean, I totally understand if the stock market crashes and your net worth takes a bit of a hit as a result; but just because the S&P grew only 10% instead of 15%, I don’t see that as enough of an excuse for why my net worth only grew by 10% instead of 15%. Looking at it another way, I wouldn’t want to fall into the trap of using external factors as an excuse for my net worth performance.

But I see what you’re saying, and I agree that there are definitely cases where your net worth will fluctuate from year to year. That’s why looking at your long-term growth is so important: it takes care of those “bad years” by also including the “good” ones in your calculations.

]]> By: broknowrchlatr http://www.punny.org/money/your-total-measure-of-wealth-age-and-net-worth/#comment-52320 broknowrchlatr Thu, 22 Mar 2007 02:48:20 +0000 http://www.punny.org/money/your-total-measure-of-wealth-age-and-net-worth/#comment-52320 Great article. I've never really looked at my results like this yet. Three things: 1) When going back 1/3 of your life, you shouldn't look past the point where you started working at your current education level. It doen't help for me to compare vs when I was 17 years old and my net worth was about $1000. 2) Your annualized grrowth calculation is a bit off. Try this: [annualized long term growth]=[long term net worth growth+ 100%] ^(1/[age-3]) In your exacmple 3^(1/8)= 1.147 (14.7%) 3) Use caution when using the annualized long term growth in forward projections. Due to savings rates decreasing as a portion of net worth, declining income increases, and other factors, it is inevitable that annual growth rates will decline. Great article. I’ve never really looked at my results like this yet. Three things:
1) When going back 1/3 of your life, you shouldn’t look past the point where you started working at your current education level. It doen’t help for me to compare vs when I was 17 years old and my net worth was about $1000.
2) Your annualized grrowth calculation is a bit off. Try this: [annualized long term growth]=[long term net worth growth+ 100%] ^(1/[age-3])
In your exacmple 3^(1/8)= 1.147 (14.7%)
3) Use caution when using the annualized long term growth in forward projections. Due to savings rates decreasing as a portion of net worth, declining income increases, and other factors, it is inevitable that annual growth rates will decline.

]]> By: Your Total Measure of Wealth: Income, Personal Savings Rate, and Rate of Return | Punny Money http://www.punny.org/money/your-total-measure-of-wealth-age-and-net-worth/#comment-52203 Your Total Measure of Wealth: Income, Personal Savings Rate, and Rate of Return | Punny Money Wed, 21 Mar 2007 02:51:41 +0000 http://www.punny.org/money/your-total-measure-of-wealth-age-and-net-worth/#comment-52203 [...] already reviewed the two easiest parts of your Total Measure of Wealth: age and net worth. Today we’ll cover three more simple components that belong in your wealth [...] [...] already reviewed the two easiest parts of your Total Measure of Wealth: age and net worth. Today we’ll cover three more simple components that belong in your wealth [...]

]]> By: Michael http://www.punny.org/money/your-total-measure-of-wealth-age-and-net-worth/#comment-52032 Michael Mon, 19 Mar 2007 17:30:44 +0000 http://www.punny.org/money/your-total-measure-of-wealth-age-and-net-worth/#comment-52032 You're, like, asking us to do math and dividing and stuff. That would be so not cool if we didn't have spreadsheets. :) You’re, like, asking us to do math and dividing and stuff.

That would be so not cool if we didn’t have spreadsheets. :)

]]> By: Finance Findings For Monday, March 19, 2007 http://www.punny.org/money/your-total-measure-of-wealth-age-and-net-worth/#comment-51988 Finance Findings For Monday, March 19, 2007 Mon, 19 Mar 2007 07:19:48 +0000 http://www.punny.org/money/your-total-measure-of-wealth-age-and-net-worth/#comment-51988 [...] Your Total Measure of Wealth: Age and Net Worth [Punny Money] [...] [...] Your Total Measure of Wealth: Age and Net Worth [Punny Money] [...]

]]> By: Nick http://www.punny.org/money/your-total-measure-of-wealth-age-and-net-worth/#comment-51808 Nick Sat, 17 Mar 2007 22:28:29 +0000 http://www.punny.org/money/your-total-measure-of-wealth-age-and-net-worth/#comment-51808 Good question, HouseWealthy. You'll notice that <a href="http://www.punny.org/money/net-worth-is-not-wealth-how-to-determine-your-total-measure-of-wealth/" rel="nofollow">Housing Status</a> is one of the parts to the wealth measurement, and I'll be covering it in an upcoming article. I'll talk extensively about how one should include a house (and how/if equity should be included) in wealth calculations. Once we cover Housing Status, I may need to come back here and add a few notes to the net worth calculations. But all of this is a work in progress, so some parts may change as others are completed. Good question, HouseWealthy. You’ll notice that Housing Status is one of the parts to the wealth measurement, and I’ll be covering it in an upcoming article. I’ll talk extensively about how one should include a house (and how/if equity should be included) in wealth calculations.

Once we cover Housing Status, I may need to come back here and add a few notes to the net worth calculations. But all of this is a work in progress, so some parts may change as others are completed.

]]> By: HouseWealthy http://www.punny.org/money/your-total-measure-of-wealth-age-and-net-worth/#comment-51698 HouseWealthy Fri, 16 Mar 2007 23:34:46 +0000 http://www.punny.org/money/your-total-measure-of-wealth-age-and-net-worth/#comment-51698 These are interesting equations. How about the argument that one should not include the equity of their primary residence (if they own a home) in their net worth calculations? I have hear this and am not sure if I agree. How do you compensate for people who do not own a home? Just a thought. These are interesting equations. How about the argument that one should not include the equity of their primary residence (if they own a home) in their net worth calculations? I have hear this and am not sure if I agree. How do you compensate for people who do not own a home? Just a thought.

]]> By: eh http://www.punny.org/money/your-total-measure-of-wealth-age-and-net-worth/#comment-51565 eh Thu, 15 Mar 2007 12:31:49 +0000 http://www.punny.org/money/your-total-measure-of-wealth-age-and-net-worth/#comment-51565 interesting & worth reading (as least so far....) interesting & worth reading (as least so far….)

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