Calculating Networth

I’ve been asked this question by a few of the blog readers and thought that I should respond as a post as other people are probably asking themselves the same question.

Question:
“Why do you refer to your portfolio value as your net worth? Or did I read it wrong...”

You didn’t read it wrong...I do refer to my portfolio value as my networth. I know this isn’t the traditional way of calculating networth but for my purposes I feel it’s the most accurate considering my early retirement goal. I’ve done a rough calculation and the cash flow from 1 million dollars is way more than enough for me to retire on…..but I’m pretty conservative and want to have a cushion in case something in my plan goes wrong (plus 1 million is a nice round number – really rolls off the tongue).

I’ll outline the items that a traditional networth calculation includes and try to explain why I don’t.

ASSETS

Cars – I don’t include them because they’re a depreciating asset and for me a necessity. Just an example but if someone had no money in the bank but a paid off $60,000 BMW I wouldn’t say he’s worth $60,000 (if he sold the BMW bought a $15,000 civic and put the rest in the bank I’d say he’s worth $45,000)

Equity in my Primary Residence – This is my thinking (it might be skewed a little) but including your primary residence is pointless, basically because you have to live somewhere (my mortgage is less than rent). I’ll include the equity in my home once I sell it. As an example, if I sell my home for $200,000 and buy another one for $150,000 I’ll invest the extra $50,000 and include it at that point. Just to illustrate this point, if I lived in Vancouver where housing values have sky rocketed and I have a house worth $400,000 to me it’s not worth including in my networth unless I’m planning on moving to a cheaper town, or downsizing to a condo (which are also ridiculously expensive in Vancouver) because as I said you have to live somewhere and I don't ever plan on renting.

Money in Chequing Accounts – I don’t include simply because it’s not large enough to really make a difference (when it does get large enough I transfer it to my investing account)

Work Pension Plan - I’m part of a defined benefit plan (indexed to inflation), so basically when my years of service + age equals 85 I can retire with X amount of my full time wage. I don’t currently count it because it is not that large and hard to calculate on a monthly basis but I will include it when I leave the position.

Any Personal Items or Collectables – Well I don’t really have many and if I did I wouldn’t include them because I won’t ever sell them (I’m keeping my clothes and fishing tackle until they’re worthless)

LIABILITIES

Personal Debt – I don’t have any.

Car Loans - None

Mortgage – (I know people are going to have a problem with this) but I do have a mortgage but don’t count it against my networth. I don’t count it because I have a very modest house that’s 30% paid off and my mortgage payments are less than rent in the city I live in. Additionally, I don’t count the equity in the house toward my networth. (If I did consider mortgage debt I’d have to consider the value of house – which would inflate my networth.) I plan on posting on the topic of mortages in the near future.

If there are any more questions that you have I’d be happy to answer them in the comments section. Cheers.