Like Nick, I believe that there's more to measuring your finances than net worth. My net worth is around $13,000. That's not a lot, but what if we compare my net worth as a 23-year-old to a net worth of $75,000 belonging to a 56-year-old? Who's better off? I am, right? Then again, what if you compare my net worth to, say, Wanda's? If I recall correctly, we have about the same amount of money invested (2 years' worth of Roth contributions), and though I've got a nascent 401(k) into the bargain and she's got a little student loan debt, she's got a job lined up for after graduation, replete with a salary that may bump her over the Roth contribution limit, whereas I make a salary at the very bottom of the 25% bracket and am considering going back to graduate school (for a doctorate in English literature) in the near future. Who's better off? I'd put my money on Wanda.
The point here is not just to beat my favorite dead horse about personal finance being personal, but also to point out that a single number can't really sum up the factors that affect our financial lives, chiefly opportunity. Being an American citizen, a native English speaker, a college graduate, a holder of a business degree, a holder of a PhD, a holder of substantial reserves of time over which to reap the gains offered by compound interest...there's no way to quantify those things. They don't turn up in our net worth calculations. But they certainly do affect our senses of well-being, both financial and otherwise.
Wednesday, March 14, 2007
Net Worth in Context
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You're absolutely right - from an economic perspective we should expand the definition of net worth to include "human capital" = your future earning power. The 56 year old with little in savings also has less future earning power... And also you'd want to include things like propensity to save vs. consume and potential rate of return on investments (some people are unneccessarily risk averse others are very savvy in finding good investments). Those four variables would probably cover most of what is important. Or are there other things too?
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