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Which is More Important - Net Worth or Wealth?

Which is better: high Net Worth or high Wealth?  If you are a weekly reader of my Personal


Growth Lane and Personal Financial Leadership Lane, you may have realized that 2024 involves some change.  I really hope that you are adjusting with me; and you are liking the changes.  In fact, I really hope you are looking forward to our Dock Time podcast discussions coming in February!  


Back to the question at hand.  Do you have an answer?  Let’s define them to answer the question together.  Net worth is the difference between assets and liabilities.  (Very Simple) Example:  If you have a house valued at $250,000; and you have paid the principal of your house loan to the point of having equity (paid value) of $200,000, then you still owe $50,000.  And let’s say you have a retirement account valued at $320,000; and a car loan of $10,000.  Then you have a net worth of $560,000.


Assets

Liabilities

Net Worth

House ( $250k)


$50,000

-50,000

Retirement Account

$320,000


320,000

Car Loan (Hopefully  car value > $10k)


$10,000

-10,000

Total Net Worth

$320,000

$60,000

$260,000

Of course, at this point, I have simplified the example and left out everything involved with everyday living.   Let’s continue that simplicity with the wealth definition.  In fact, for argument’s sake, I am including assets only that can be easily converted to cash value.  (We will assume that the house and car are meant to be housing and transportation, and not intended to be converted to cash, therefore they are not  included in our asset column, at least for this scenario.)  Therefore, for this illustration, the net worth is a positive $250,000!

Wealth is a measure of how long (in days,weeks, months, or years) that you can survive if you have no more income from a current job; and you have only what is easily available or can be converted in a timely fashion.  In this case, we do not know if the person is of a retirement age, and could use the retirement money; nor do we know what the required living expenses are.  For the sake of this example and simplicity, let’s say the person has access to the retirement money, and that living expenses including the car loan are within $5000/month.  Without taking into account investment returns or inflation (all for simplicity), and let’s say that we are not selling the house because we still want a place to live (and we haven’t determined if there are kids that we can move into their house anyway).  To get our wealth number, we take the $320,000 assets, subtract the committed liabilities of $60,000, this leaves $260,000.  Then we take the $260,000 and divide by $5000/month to get 52 months, or 4 years and 4 months. 


One final notion, if we include an estimated 10% return on the $320,000, that gives us another $32,000/yr, which is equal to 6 months of withdrawals (simple scenario, not including taxes), which means we do extend our wealth life, however, it is important to realize that we are still withdrawing more per year than we are making from the typical investment growth. 



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