Lots of our readers want to know more about the formula we use to calculate our net worth. Since our readers have been posting these questions for months now, perhaps it’s time to fully answer them!
Why do you include your household items/jewelry/cars/etc in your formula?
We are using the net worth formula found in Jane Bryant Quinn’s book, Making the Most of Your Money. This very-thorough formula classifies assets as “Quick Assets,” “Restricted Assets,” and “Slow Assets.” Jewelry and cars are considered “Quick Assets.” Household items are considered “Slow assets.” There are many variations on net worth formulas. Quinn notes that while cars and jewelry are not part of your usable net worth, they should be included to be sure you have enough insurance to protect all your assets. Some formulas, such as the one in Rich Dad, Poor Dad, limit the definition of an asset to “something that makes money for you.” Both definitions are accepted standards and are valid ways of classifying assets.
Why did you choose this formula over other formulas?
This formula was appealing to us because it allows us to include the value of many of the items we own. Because our net worth is negative, it is important to us not to be too negative ourselves. Each month we chart our current net worth against our desired net worth of zero. There is a huge gap between the two, but we can see the lines slowly starting to converge. It is hugely important for us to be able to see the light at the end of the tunnel. Calculating our net worth as even lower could make the situation feel overwhelming and hopeless. In order to increase our net worth, we need to have a reasonable starting point.
As I mentioned above, some net worth formulas focus more on income-earning assets. This type of formula will be much more appropriate for us once we pay off our debt and are focused on increasing our income-earning assets.
Why do you continue to use this formula even though many readers have questioned it’s accuracy?
The most important data that our net worth chart reveals is “trends over time.” We have been tracking our net worth for almost a year using this formula. Changing the formula now would give us “apples to oranges” information which would prevent us from analyzing trends over time. When we hit our net worth milestone of zero, our net worth goals will change. This would be an opportune time to choose a new formula to reflect our new goals.
Why do you include the value of your engagement ring, even though you say you would never sell it?
Because the Quinn formula includes the value of jewelry. Interestingly, one of the original purposes of the engagement ring was to provide the woman with something of value that she could sell (as a last resort) in the event her husband was unable to care for her. It was a sort of insurance against starvation. Though the tradition is different today, engagement rings were at one time intended to be a saleable asset.
Why do you list the value of your household items at $25,000? Is this what you paid for them?
With the exception of jewelry, we are listing our estimation of the resale value of our items, not the price we paid for them. The Quinn formula uses the appraised value of jewelry. The $25,000 total includes the appraised value of our jewelry plus an estimate of the yard sale value of our other household items.
What was your net worth when you first calculated it? Is it going up?
Our initial net worth was negative $98,615.39. It is increasing. Our goal is to hit zero, then re-assess.