We're Not on Crack: Our Net Worth Formula Examined
Posted on October 17, 2006 by Her and tagged net_worth
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.
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Medicated Money | Oct 17, 2006
Very interesting post! What makes personal finance great is the fact that it is just that, 'personal.'
Personally, we think the complete opposite in whether one should calculate household items/cars. Is our version right and yours wrong? Absolutely not; it is again a very personal decision in determining what to include and what not to.
However, I think it is to be expected that when posting net worth numbers, many in the personal finance community will question your calculations if numbers are based on items that are difficult to determine their true worth!
Good luck in your progress to get to $0!
-Medicated
Amy | Oct 18, 2006
I have to agree with Becca what do you have that is worth so much or is it just a guess. I did a loose estimate for my husband and I and we came no where close to 25K. How much are you assuming you are getting for things at a yard sale. I put a value of $1-5 on the majority of our stuff.
Household items can add up much faster than people realize; especially if you have certain hobbies or preferences for high end items or specialty items. I added a list of many items that can be calculated in assessing household items value and reflected on how our items probably value at least $25,000 and probably much more.
Caryn | Oct 18, 2006
I have to agree with Becca and Amy. I am curious to know what you have in personal property that you believe to be worth a total of $25K. Obviously that is your business and you can choose to explain or not but since you do list it on the blog, I would love to see a more detailed explanation of how you can to reach that sum.
autologic | Oct 18, 2006
Your household items category is flawed. If you are counting the value of your possessions then this number should be going up every month. You bought that $300 digital camera, $3,000 plasma TV, and that $1,200 coach hand bag? Well then your net worth just went up $4,500 and you got what you wanted. It's like having your cake and eating it too. In all seriousness, isn't it going to suck when you "reach zero" only to recalculate your net worth (not including household items) and suddenly become $25k in the hole again? If you really are only concerned with trends than you could subtract $25k from all your numbers and the trends would be exactly the same. Just my .02...
pinkshoes | Oct 18, 2006
Actually, autologic, if the items they purchase even just retain their purchase price as "worth", buying things would result in a break-even, not a gain.
If you spend $300 on a digital camera, and the camera is "worth" $300, money out vs. value of acquired property = net gain/loss of $0.
If, however, items one purchases automatically become "worth" less upon purchase (which is the reality for nearly everything we buy in a retail setting - even if it is "on sale"), then the hit to personal net worth is double. Your cash is less (or credit card debt is more), PLUS you've actually lost the marginal extra amount you've paid that the item can no longer be re-sold for. Not to mention the other extra ding you take if you buy it on credit, in the form of interest/fees/etc.
Unless a person is a discerning buyer of high-end used goods who can truly buy something at auction/estate sale that is worth MORE than they pay for it, the goods a person owns are worth far, far less than the money that is used to buy them.
autologic | Oct 18, 2006
pinkshoes, your logic is flawed. A simple example: Let's say I could buy a camera for $300 and I could resell that camera on ebay for $200. If I count the resale value of the camera as part of my net worth than purchasing a $300 camera only reduces my net worth by $100. If I do not include the resale value of the camera then my net worth has been reduced by $300.
My point regarding the inclusion of 'household items' in net worth calculation is that the value must change for it to be realistic. Either you are buying stuff (increasing value of total items) or the items are getting older more used thus worth less.
questioner | Oct 18, 2006
In May, Him wrote that you guys still had to research the resale value of your stuff. You estimated the value at $25,000 back then.
Can you do a breakdown of the categories of your household items so we can see where you're getting these values?
Something like:
__________________
Your clothes and shoes: $xxx
His clothes and shoes: $xxx
Computers:
Entertainment electronics:
Kitchen appliances:
Other kitchen goods:
Living room furniture:
Kitchen furniture:
Bedroom furniture:
Office furniture:
Books:
Jewelry:
Etc:
Jen | Oct 19, 2006
Not to dog pile on y'all here, but jewelry rarely appreciates. Your average engagement ring gets pretty beat up and would definitely not sell for its initial appraised value. It's not an investment unless it's a significant rock and until it reaches the age to become "estate jewelry" (that's around the 50 year mark, I believe).
I like your net worth calculations - yes the "household goods" could be misleading, but I agree people focusing on that are missing the point. You are measuring your progress and emotionally it helps went the finally tally doesn't look so bad.
The important part is your are measuring every month and you aren't playing with the numbers to "fake" progress.
600k | Feb 14, 2007
I'll add my $0.02 since I've been tracking my net worth like you are for the last 10 years. I found myself doing the same thing you did when I started tracking my net worth (less) out of college, accounting for all my personal items of value like mountain bikes, golf clubs, TVs, etc. I was always pretty conservative in estimating their value (what I would get at a yard sale for them). After my net worth went positive I just ended up deleting the category altogether. I suspect you may choose to do the same thing at some point in the future. Now that my net worth is significant, I could really care less what all my furniture and household items are worth because I would never envision myself getting to a point where I would need to sell all of them. My wife and I don't collect anything of value or have any expensive designer furniture or art so this may be different for those that do. My focus for my tracking now is what is my retirement nestegg and college savings plan for my daughter. The net worth calculation is interesting but a big chunk of that for me is my home equity and I'm not planning on selling my house anytime soon or even when I retire so it's not the metric I care the most about any more.
becca | Oct 17, 2006
My question reading this has always been "What do you two own that's worth $25,000?????" I'd guess that my partner and I would get less than $5,000 if we sold all of our stuff. Did you actually calculate your number, or is it just a guess?
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