Is Your Net Worth the Highest When You Are Young?

Say whaaaa?...what the budgetpoor spreadsheetooors don't know enough to tell you

What if I were to say that at a time in your life when your net worth is lowest, you may actually be at your richest? A time when you absolutely feel dirt poor and are stressing about your finances?

Young ‘You’ choking out Old ‘You’ by not handling your finances

It isn’t captured in traditional net worth calculations, but that is ok. Most people use net worth as a vanity metric anyway. They throw in every conceivable asset they can and really pump that net worth up.

“Sure, I need to live somewhere. And I’ll probably stay in this house another 20 years, unless my growing family requires me to upgrade to a bigger (more expensive) home. And maybe far, far away in the future when I retire I downsize and take some equity out. And then one day I’ll die with a paid off home…but lets throw all my home equity in my net worth.”

“Sure my 401k and IRA are taxed when I withdraw it and, due to required minimum distribution (RMD) rules, I do need to withdraw it (ironically around the time I will downsize and finally get some equity out of my home)…But when I add up my accounts, I’ll just ignore that huge future tax-liability (while ironically including home equity that I won’t turn into cash around that time).”

So yes, most people are grossly overestimating their actual liquid value of assets in their net worth.

However, even if it isn’t an accurate portrayal of their wealth, as long as you keep the metric the same and it is increasing, you are going to generally be growing your real net worth too.

We have talked about that before though.

“My net worth is higher this year than last year, so I am doing good.”

This seems to be the general sentiment most finance-focused accounts make. Net worth grows = good.

And a growing net worth is certainly better than seeing your net worth going down year-over-year, don’t get me wrong.

But it always left a little to be desired for me. It is a very myopic and narrow view of net worth.

In theory, you could save $0 and have all your money sitting in a savings account and see your net worth grow 3.5% over the year. You are 1 year older, but your net worth has gone up, so you are doing well, no?

Other than when you are in a markets down scenario, your net worth should be growing over time. And that is the big issue - every year you are 1 year older. If your net worth is up are you better or worse off than a year ago???

And could you actually be your wealthiest when you are young despite loans and mortgages and virtually no assets?

This idea was introduced in a different net worth post, but it is important enough to get its own dedicated post to flesh it out some more.

How could this all be? And is there 1 piece you are missing in your net worth tracking that can make it infinitely more valuable? (yes, the answer is yes)…