Why knowing how much is your net worth is not enough
When I was a ‘wealth drifter’ – you know, when I didn’t know how much I earn, how much we spend and how are we going to live in a month’s time – asking myself how much I am worth was about my values, standing and reputation. In other words, I was more concerned about social and cultural capital then the wealth that is the foundation around which these weave.
Things changed and I have morphed from a ‘wealth drifter’ into a ‘money management ninja’: I know all my numbers, we paid off all our consumer debt in record time and money management forms the core of The Money Principle. Then I also realised that as good Marxist it is my sacred duty to reconcile labour and capital, the source of exploitation and all evil. Since I have labour anyway the missing part is capital.
Now, when I ask myself how much I am worth it is about capital – hard, cold, pure cash and assets. Every couple of months I update the data in TMP Net Wealth Calculator: a satisfying exercise overall since our net worth has been growing steadily for the last three years. In fact, starting in January 2011 our net worth has increased by £173,000 ($271,000) – this includes paying off all our debt, increasing the value of the house by re-building the bathrooms, decorating the kitchen and another room and contributing to our pension schemes.
Should feel good, right! I am not going to insult my readers with misplaced modesty and over-criticism – it feels great. Still, every time I do check our net worth, there is a pang of disappointment and annoyance.
Our net worth is increasing, true; but it can increase so much faster and more efficiently were its structure better.
What are the structural problems of our wealth?
Before I go on and tell you how I see the four main problems with our wealth let me make some observations.
- Observation 1: About half of our net wealth is in non-income generating property (houses, apartments and land) and possessions.
- Observation 2: Another 45% of our wealth is in our pension funds.
- Observation 3: We have very few investments (apart from our pension funds).
- Observation 4: We still have low level of liquidity.
From these observations I worked out three key structural problems. These are:
- Problem 1: Our money is not working for us because it is mostly tied up in non-income generating property.
- Problem 2: Following from this, growth of wealth is possible mainly through ‘selling labour’. This has natural limits in the cost of labour and time and the steep growth we need to be able to achieve our financial goal is problematic.
- Problem 3: Our low level of liquidity means that we can’t act quickly on exceptional investment opportunities.
Good analysis; what are you going to do about it?
This analysis made me realise that our issue is not with how much our wealth is, but with the structure of this wealth. We are remedying the problems identified above by:
- Selling some of the property; and
- Building liquidity fast.
This is our focus until March 2014.
In personal finance, it is very tempting to focus on relatively straight forward measures like net wealth: it is easy to work out, it is specific and ‘if you measure it you can manage it’. We tend to miss, however, that ‘how much’ is an important question but not one sufficient for action. If you want to know how to increase your net worth you should also look at the structure of your wealth.
Can you see any problems with the structure of your wealth?