Thursday, June 21, 2012

Net Worth, Diversified and on the Rise

Net Worth - the sum of one's assets, minus debts.  Pretty easy concept to grasp, but according to reports in the news, not such a good thing to track these days.  It appears that the average net worth in American has decreased over the last several years (decade).  Really?  Why?

My opinion, fact or not, is that the only reason a lot of people claimed the net worth they did, up until 2007, was because they included their home equity in the equation.  This, of course, rose exponentially leading up to the big crash and recession.

My second opinion, is that you shouldn't really count your home equity in your net worth equation.  Or your cars, or most other stuff.  For ours, I include the value of the cash we have in banks, the value of our retirement savings, investments, and any other savings and money we have.

I'm in a good position in that I'm fully vested in the State Retirement System, meaning that I contribute 6% of my salary (mandatory) into a defined benefits plan that compounds annually at 4%.  There is a value of this account that I can easily identify, but that number, in the grand scheme of things, is irrelevant.  Upon retirement, should I be fortunate enough to work here for another 19 years, I'll receive a monthly pension (some amount of the average of the last 4 years' salary).  This amount will be more than enough for us to live comfortably, especially since our house will be long since paid off.

So, in addition to this amount that *never* decreases in value, we've also been saving cash for a large emergency fund.  This cash earns very little interest, but similarly (as long as we don't have a major emergency) doesn't decrease.

The other big amount that makes up our net worth is retirement accounts.  This is where our fluctuation is, but as it goes down with the market, it also goes up.  We also put money (not maxing anything out, mind you), into this account with each pay-check, so the account balance generally trends upward.

The takeaway is that diversification is very important when it comes to net worth, both building and increasing.  Put all your eggs in one basket, like home equity (that may not even be the result of hard work, but mere speculation), and you'll be bitten hard in the ass if one part of the economy tanks.