It is said that your net worth is a score card for your life. There are some who disagree, but they are the same people whose participation trophies are proudly displayed on the mantle. In any case, you may want to know what your net worth is.
The basic formula is simple; what you owe (debt/liabilities) subtracted from the tangible dollar value of what you own (assets). Figuring the components of the formula is not so easy. Net worth fluctuates over time. You'll pay some bills. You’ll incur some new debts. You'll acquire more stuff and the value of that stuff will ebb and flow. Ideally, more ebbing and not so much flowing…
Some things that you own are not assets, even some of the fancy stuff. Your Ferragamo shoes are not considered assets. Your Rolex watches are because they’re proven to maintain and even increase in value over long periods of time. That’s what assets do. Asset values are determined, not by what you paid for a thing or how much you like it, but by their marketable value or the cash-flows they generate. Does the asset generate income? Does it generate more cash than it costs to maintain it? Can you turn it into cash? If so, how much cash and how fast? For most of your assets you won’t have to offer them for sale to asses their actual value. Sometimes you will though. A thing is only worth what someone is willing to pay for it. Stocks, bonds, cash and marketable securities have their values tracked and posted throughout the day. That is why they are considered liquid assets. Paintings, sculptures, other art and collectibles – not so much. Appraisals are used for insurance purposes, to assess replacement values. Should you ever decide to sell though, potential buyers won't care much about insurance values. Those sorts of things are illiquid assets. You can’t truly figure their value without offering them for exchange one way or another, and the more desperate you are to liquidate them, the less you’re likely to get for them.
At times, assets can be liabilities. If your valuables require expensive care and upkeep, they could possibly fall into that category. My collection of clocks definitely falls into that category. Real Estate can be like that too. If you have some, you know how that can go. That is why not all assets are investments. Investments are undertaken with the specific intention of increasing cash-flows and/or principal value (capital gains). It doesn’t always go that way, but that’s what you’re thinking going in. Stocks, bonds, mutual funds and the like are the most commonly referred to investments. Buying or starting a business can be a great investment. It is risky, very hands-on and in no way passive, but all of the wealthiest people in the world are business owners (or monarchs. You can’t be a monarch), so it could well be worthwhile. Real estate is a popular investment and sometimes a good idea. The house you live in though is not an investment. That is your residence. That's where you keep your stuff and where your grandchildren play and make memories. Art, collectibles and “passion purchases” should not be considered investments. Some of them do increase greatly in value over time, but it’s nearly impossible to predict or to quantify. Also, you don’t acquire with the intention of extracting value either through cash-flows or a future sale. Of course, if nothing ever sold there would be no art to buy and no values could be established at all. I can say with a fair degree of confidence though that sellers probably didn’t buy with the intention of selling – even when the sales are highly profitable. Those assets serve other, equally important purposes though. Those are the things that elevate life from the mere act of not being dead to something potentially wonderful.
Since your assets and therefore your net worth will be the basis for your life and legacy, you’ll want to protect and grow them as much as is reasonably possible, investment assets and non investment assets alike.
First, you want to buy carefully. If you’ve bought the wrong thing, there isn’t much you can do to fix that, except to cut your losses and exit quickly. Unfortunately, you won’t always know right away if you’ve made a mistake and when you figure it out you may be locked into real losses. If you’ve bought a business you can maybe correct course, but that will be hard and expensive so be careful going in. Protect yourself and your estate with thorough, careful research and sound consultation. That advice can apply to all of your acquisitions and expenditures.
Second, insurance. Insure everything that can be insured and insure properly. Wrong insurance is like no insurance, only more expensive. For stocks, bonds and the like you insure with hedges, options and a thoughtful management strategy. You insure your income with life insurance. Your income is the thing that makes the whole thing go. For most families, a permanent loss of income would derail their lives and adversely impact any legacy plan. Poor health and/or long life can consume a lot of your assets. You should insure for that too. To be cursed with a long life is a cruel irony indeed.
Next, care and maintenance. Everything is subject to the laws of physics and the ravages of time. You must be proactive in taking care of things that matter. Repair, maintenance, upkeep… For that you need cash, so when you've retired, some significant portion of your assets need to be income generating.
Having assets makes life nice. They make a good life possible. Some assets can make life beautiful. If you get most of that right, your assets can continue to do what they’re supposed to; make life lovely and represent your legacy long after you’re gone.
William S Jiggetts