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 so that it can generate the maximum cash flow.. 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?

photo credit: Shoes on Wires via photopin cc

20 thoughts on “Why knowing how much is your net worth is not enough”

  1. I like that you took a look at your situation and were able to realize that one aspect doesnt paint a clear picture. A lot of people solely look at net worth decrease and increase but that is only part. You seem to have a lot of properties with no income from rent. Are these properties hard to rent out?

    1. @Thomas: Correct, the properties are not appropriate for renting out at this point – two apartments are in Bulgaria. This is changing and we are selling one of these and will try to arrange a short term let for the other one (until recently my sister lived there).

  2. I’m pretty happy with the structure of my wealth at this point, the amount of it, however, is a different story! 😛

    I like the analysis you did. I don’t think most people look at more than what their total worth is when they should pay more attention to where it is as well.

    1. @Krant: Depends on the assumptions; when I calculate net worth I am thinking about the estate I’ll leave behind. And we have quite a bit of equity so…

  3. Lovely analysis and great decision-making because of it. Liquidity is a huge concern because if you get into trouble now that you’re debt free, it’s the only way to save yourself from falling back into debt. You can’t sell off a couple rooms of your property to buy new utilities!

    I DID have a problem with my net worth. I’d thrown everything into building my business. If it had gone bust, I would have been in severe trouble. Luckily, I was able to sell it and diversify the proceeds. That’s helped even out our financial picture.

    1. @AverageJoe: Thanks! Liquidity is the main thing we are working on at the moment. I should have bought CashFlow earlier – the best $80 we have spent in a long while :).

    1. @David: Probably not a bad idea. Mone in savings accounts or in non-income generating real estate is ‘dead’ money – it is not working for you. Ultimately the ‘name of the game’ is to shift from ‘selling labour’ to ‘selling reputation’ and to ‘your assets working for you’.

    1. @SuburbanFinance: Mmmmmm…I think it is always useful to know; or shall we say to see it. This may make you think how to change the structure of it to maximise the gain.

  4. Interesting how many people look at their home as their biggest asset when it is in fact the largest expense. While historically low interest rates have made real estate an attractive investment and can generate cash flow, the old homestead only generates cash flow if you can sell it and cover your carrying costs!

    1. @Paul: Agreed – a house is a liability. But a necessary one and if one buys smart (which John has a gift for) it can get interesting. Real estate is not a prefered investmenr at the moment….

  5. sounds like you have a plan! I don’t know if my nw is ideally allocated or not, maybe a bit too much in real estate and not enough in stocks but I am glad I didn’t contribute to pension much and have the cash to invest.

    1. @Pauline: Ha, ha; as I said: we should start thinking of pensions as one possible financial instrument that brings income when we can’t work any longer.

    1. @Mike: When I first saw the Alhambra it took my breath away; literally and I am not exaggerating. And all that wealth and restrained beauty! They were also very cultured with it!

  6. I just started focusing on getting out of the consumerist mindset this year, so my net worth isn’t anywhere close to where it should be. Hopefully in a year or two it’s going more in the right direction :p

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