Each month, I have been writing a few articles on a particular topic of financial planning. This month’s topic is net worth. You may think that there is not much to write about because net worth is a relatively easy calculation. The calculation is simply the difference between your assets and your liabilities (debt). Right? If it was so easy, then why is it that people avoid calculating their net worth?

In the article If Numbers Were Just Numbers, I explained that if numbers did not hold any meaning than doing a budget would be an easy task that everyone would be able to do within a few hours. However, it is the feelings that come up around a budget that deters us from doing it. We avoid a budget to avoid the feelings we associate with numbers (such as shame and guilt). As Lasertroly said: about my article:

Excellent point …. Maybe that’s also true of so many of our other numbers as well: our home’s market value, our salary, the price tags on our gifts and other purchases, etc.
Well, it is right on point. Many people avoid looking at our net worth out of shame. We avoid looking at investment statement when there is a down turn in the market. We avoid credit card statements if we can not afford paying even the minimum payment. We think we may feel better by avoiding the pain caused by looking at our debts and declining investment returns. However not looking at these statements will not make the situation better; it can actually make the situation worse by avoiding. We would be better off looking at our numbers and see them as numbers. However, we try to hide them and avoid tackling the problems. We also prop up a mask to show the world to hide our problems, for example

• Bigger home than we comfortably can afford

We say the home is our castle. It is the first impression that people see when they come to visit. Thus, some people look at a bigger home as a sign that they have made it in the world.

• Buy a car for its name (BMW, Lexus, Jaguar, etc.)

The issue is that it is not just one car that we get for the fancy name. Once we have the car, what is the next car we get? Probably a car that is similar or better even if we have hit some hard times. Once you own a Lexus can you go to a Saturn?

• Keep up our activities even if we hit a bump in the road

When there is a bump in the road, we are slow to act hoping that our finances will get better. If we need to cut something from the budget it is hard to do because wee see it as a loss of our financial status that we are afraid to face.

• Avoid selling stocks or homes for a lose

I have had discussions with people reluctant to sell their homes recently fearing that they may lose money from when they had bought it. Even though, they want to buy a bigger home, the thought of losing money brings up shame even though it is a good time to find a better deal on a bigger home.

This is because we equate our net worth as a sign of our self-worth. Thus we also let our salary affect our self-worth, we feel like it is a slap in the face if

• If we do not get a large of a bonus as we feel we deserve
• If we get paid minimum wage
• If we need to take a pay cut even if it is for a better job with more opportunity for growth (we are afraid to sacrifice take a short-term pay cut for long-term opportunity)

So can you look at your net worth as just a number? Some people may look at it with pride. Note, this is dangerous as well because if we are proud of how much we have, we will feel a hit to our self-worth (pride) when we lose money due to a downturn in investments or needing to pay a large medical bill.

What does your net worth mean to you? Why does our net worth have an affect our self-worth? For our net worth sake, we should start seeing that money does not make us who we are. When our net worth affects our self-worth, we will be depressed when our investments decline (like they did last week) and eagerly try to fix it by stopping our losses instead of being patient and riding out the ups and downs of the market. In addition if we have a loss of a job, having our self-worth tied to our job and money will lead us to a downward spiral just at the time that we need a high self-worth and confidence to land the next job. So, it is important not to base our self-worth based on our net worth (no matter how good it is now).

This entry was posted on Tuesday, March 6th, 2007 at 6:11 pm and is filed under Net Worth. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.