Brip Blap recently wrote an interesting piece on why he thinks net worth is not an awfully important metric to know. This article created an active discussion thread with some people disagreeing.
My thoughts on this. The principal metrics we should have are:-
Knowing where we are financially at any one time.
No matter what our financial goals are, this is an important piece of information to have. Without knowing where we are, it would be next to impossible to get to where we want to go.
A good indicator is the balance sheet, or our net worth statement. This has to be consistent. For example, whether you want to include or not include your house and mortgage, whether you want to take your house at market value, whether you want to include your vested pension, etc.
Our financial progress
The two tracking statements for these are our cash flow statements (how much net cash flow we generate, whether positive or negative) and our profit and loss statements (how much do we spend from what we make). Good indicators of these would be our yearly spending statements, if we have one.
What I use
I refer to 2 statements:-
a) My net worth statement
This is a list of all my assets less all my liabilities. (We include the house). Yearly I track the increases / decreases against the previous year’s total. (In 2006 and 2007, my NW decreased by 3.60% and 7.75% respectively. This was basically the costs of university education for our 2 elder girls. Hopefully, we can start building it up now that the kids should be completing their studies).
Whilst I keep myself aware of the various rules of thumb that suggest the amounts for retirement, I really do not have a target for my NW. For the time being….just more is better…
b) Yearly Income Statement
I classify my yearly income into 5 headings,
i) Employment Income,
ii) Trading gains and losses and dividends etc from stocks and shares, (This information is easily available for us.)
iii) Property Income. (This is rental from the one property that we have).
iv) Business Income. This is from investments in small businesses that I have. Presently income is zero! These businesses are structured in such a way that I have little active participation.
v) Extraordinary income. This is unplanned, unexpected income that I had not spent any energy on.
On income our goal is to ensure that (ii) + (iii) + (iv) is equal or more than our estimated expenditure. (Incidentally, I am quite far from reaching this goal.)
My wife and I have only recently done our first budget. All these while, I have used an estimated amount as our expenses. This year we should be able to get a better comparison.
Ultimately, we have to have some sort of measurable factors to track our financial progress. This is an issue where there may be no exactly right or wrong answers. The only thing that is right is that you must design one that feels good for you and includes the relevant assets, liabilities, income and expenses.