Friday, October 3, 2008

Net Worth

I'm not a fan of the calculation though I understand the concept. I am a bigger fan of total amounts outside of real estate holdings because I feel it is a more accurate indicator of how well one can weather a difficult time.

For example: If I had a million dollars net worth of which 50% of it was real estate (assume it is paid for) then I would have $500000 "cash" placed in various vehicles. Depending on how much you would need yearly to live, that may last you until you die. What I want to caution is this. If you require more than $500000 to fund the rest of your life, then fooling yourself in thinking you have a million to spend isn't going to cut it unless you are planning to sell your house.

Real estate values only come true when you sell it and if you are counting on it as part of a retirement "savings" plan. If you are living in a home that is your "last" and do not plan to move, then I would no place such an emphasis on it as part of net worth.

My true net worth, as I see it, revolves around the concept of liquidity. Should shit hit the fan, how long can I stay afloat until I am forced to liquidate more difficult assets? How much debt do I have? What do I really own? How solid is my financial foundation?

In light of recent market turmoil, my need for increasing my financial base has strengthened. I am working towards a stronger cash position, easily attainable as a first base. I would speculate that no who doesn't have to, would be cashing anything out of their investments right now. My goal to have a few layers of just "cash" in various forms, very safely put away, amounts intact for such a time.

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