Your net worth is an illusion. Unless your house is fully paid for, and unless you can access your retirement accounts today, your net worth is not real.
Although we’ve recovered quite a long way since the 2008-2009 financial crisis, we can never fully count on the full value of any of our assets. This is especially true for less liquid assets like real estate and private equity investments. You just don’t really know the truly value until you try to sell.
The only thing we can really count on is cold, hard cash. It is a little disingenuous to say you are worth $1,000,000, when 70% of your net worth is tied up in an illiquid asset called “home equity.”
Your home is only worth as much as someone is willing to pay for it. And you just don’t know how much someone is willing to pay for it unless you try to sell.
In 2021, I thought I got a great deal selling my rental house for $2,745,000. In 2H 2021, a random realtor who believes I left $655,000 on the table! Go figure. Everybody has got an opinion, just like butt holes.
Even your 401K and IRA are suspect because those accounts can easily collapse. When it’s time to withdraw, you don’t know exactly what the government tax laws will be.
Here are all the assets that may be included in your net worth calculation.
Valuables (Jewelry, Collectibles)
For retirement purposes, your assets should equate to CASH + liquid securities you can sell today + MORE CASH.
The way to look at net worth is consistent with my “Going Broke To Win Big” methodology. In uncertain times, like we are experiencing during the coronavirus pandemic, you want to operate life as if none of your assets except for your cash is dependable.
Perhaps your retirement goal shouldn’t be a net worth goal, but a cash or savings goal if you want to be really conservative. If your home equity, 401k, IRA, private equity investments so happen to be there when you retire, great! If not, no big deal because you never counted on it anyway.
Unfortunately, our government is printing cash like it’s no tomorrow to bail us out from this coronavirus devastation. Hence, even our cash is suspect in value. You may want to buy real assets outside the country with stronger physical systems.
If you can’t do that, I’d diversify your cash into as highest possible yielding rental property as you can. Rental property is a very powerful asset to make money and hedge during inflationary periods.
As you age, feel free to regularly convert your investments into cash or more risk-free assets like U.S. Treasury bonds or AA-rated municipal bonds for that bankable guaranteed interest income. The wealthier you are, the more you need to focus on capital preservation.
The liability side of the equation on the other hand is very straight forward. Your liabilities are all your debt. Debt includes credit card debt, student loans, auto loans, mortgages, personal loans, IOUs, and more.
To better protect your net worth, you should view your net worth like it’s an illusion. It’s not real, so don’t count on most of it.
By risking all your retirement savings in the stock market, you’re doing yourself a disservice. I’m not saying don’t continue maxing out your 401K and IRA accounts every year. That is a given. I’m just saying one should think twice before adding MORE of your cash into the stock market.
One of the easiest allocation rules can simply be your age. A 40 year old should think about allocating 40% of their liquid assets into cash or stable bond funds, a 50 year old should allocate 50% to cash and so forth.
If you insist on including the value of your illiquid investments into your net worth calculation, then take at least a 50% haircut to the value. Have a cash retirement goal and not a net worth goal. You’ll be happy you did.
Related: The Average Net Worth For The Above Average Person
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This post was originally written on 9/18/2009 and updated on 7/20/ 2021. Time flies when you’re having fun!