The unimportance of knowing one’s net worth

Published: August 7, 2013 at 7:00 am

Last Updated on

The net worth of an individual is simply the sum of all usable assets after deducting liabilities. If you search for ‘net worth’ and ‘importance’ in Google, you will find several articles which talk about, how determining and regularly monitoring net worth are important indicators of financial health.

Suppose I estimate my net worth to be about 5 Lakhs, does it say anything about my financial health? I could have all that money in a SB account and claim my net worth is growing each month after I get a pay check.

If the only financial goal for a person is retirement, then tracking net worth makes sense.  This is because the retirement corpus is the net worth. Many of us have multiple long term goals (children’s education, marriage and other goals besides retirement). Under such circumstances it is meaningless to track individual net worth.

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When we sit down to draw up a financial plan, listing our assets and liabilities may help provide a sense of perspective. After that it is all about tracking the progress of our investments for specific financial goals.

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Let us ask ourselves the following specific questions:

  • If you retire today how long will your retirement corpus last? You will need to compare the answer with the number of years you expect to work
  • Pattu: About 8 years or so.  Since I have (technically) another 26 year of service, this number is not that bad (80% of my NPS corpus will be annuitized if I retire today. So I am assured of ‘some’ income all my life).
  • How about you? Strongly recommend everyone to do this exercise. You can use this, ‘How long will my money last?’ calculator to answer this (see bottom of the linked page). For those interested, other types of annuity calculators can also be found there.
  • If your child were to go to college today, what course will you be able to afford, assuming (1) you do not touch your retirement corpus and (2) you do not get an educational loan
  • Pattu:  My son is 3.5 years old. Today I can enrol him in an expensive engineering college (expensive but not necessarily competent! Competent ones are usually cheaper!). I started investing a couple of months before he was born.
  • If we should invest as much as we spend for retirement, I think, we should invest at least one third of this for each child’s education. I am determined that my son should start his life without the burden of an educational loan.
  • How about you? If you have two children you will need to ask and answer this question for each child.
  • Use this Comprehensive Child Planner to plan for your children’s education.
  • A similar question should also be asked for your child’s marriage (if you think it is important for you to invest for this. The goal is to avoid touching your retirement savings for this)
  • Pattu: I think I will have enough to fund his marriage by the time he is legally eligible! ‘Enough’ here again implies I don’t touch my retirement corpus.
  • The average age for sexual ‘awakening’ is constantly decreasing in India. Taking into account our cultural ethos, it is best to prepare for the possibility that our children may not be able to fund their own marriage!
  •  I am done with my long term goals. If you have any more, you will need to ask  similar questions regarding these.

 Note: I am sharing information about my fiscal health in the hope that it might provide a sense of perspective on what is important and why. I think this is better than preaching. I have no intention to brag.

Use an Excel file or any other tool to fill the answer to these questions each month. You will still be tracking net worth -not  your net worth but that of each long term goal.

What do you think?

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About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com
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