7 Net Worth Killers (From CNNMoney)

From CNN Money – 7 Net Worth Killers (links along with my lovely commentary):

1. Ignoring your money

Don’t take the “invest-it-and-forget-it” mentality too far. Also, don’t have too much of your money in low-yielding savings accounts.

2. Buying too much house

The bigger the house, the more you’re going to spend in mortgage payments, upkeep, taxes, and everything else. So, although the equity in the home will help your net worth grow, the money spent keeping it up will take away from your net worth. With all the dumb mistakes my wife and I have made, we made awesome choice when we bought our house. We bought what we could afford but were able to find a house in a great neighborhood. Our house is now worth about 60% more than we paid for it nearly eight years ago.

3. Driving too much car

No comment. This is a no-brainer.

4. Paying the IRS, not yourself

Take advantage of all the tax-savings vehicles that are LEGALLY available to you. Again, this is a no-brainer.

5. Always getting what you want

A lot can be said for practicing self-discipline in your spending. A lot of times we want things only because they are new or popular, which means we’re going to pay more for them. I remember people paying $10,000 more than sticker price for the Mazda Miata when it first came out. Now look at how many of them you see out on the roads. If we can force ourselves to put off buying these things, the newness will wear off and the price will decrease and we can buy them for a lot less (or we will have moved on to something else).

6. Letting your assets linger

Balancing your net worth with your cash flow.

7. Letting your debt lie

Common sense here. If you have debt, you want it to be at the lowest interest rate possible. You also don’t want to carry credit card debt or consumer debt any longer than you have to.

This is all common sense stuff. You just have to do it.

Now watch – a blogger will turn this into a seven-day “series.”

My New Fun Hobby: Updating Our Net Worth Statement

Many financial experts say that you should update your Net Worth Statement once a year or so. I update ours about once a month. Why? Because it’s fun!

Why is it fun? Because we paid off our credit cards last year and all the money that was going toward those cards is now helping us build our net worth. It’s amazing how things tend to build on each other. Instead of paying someone else for the use of their money, someone is paying us! In other words, we have reached the point where our money is helping us grow our net worth. Compounding is awesome! I love it!

No matter where you are on wealth-building road, you NEED to keep track of your net worth. It’s not hard. In fact, I even put together a general Excel spreadsheet called the Statement of Net Worth that you can download and put to use. There are tabs for each month for the remainder of the year. I even linked the cells from month to month so you don’t have to do a lot of repetitive work. If you change a number in a cell, the spreadsheets in the months AFTER that sheet will change too. You will have to manually enter any new categories that you might add.

The important thing is to get started now. I’m here to help if you need anything or have any questions.

Here are lots of other posts related to this topic:

Building Wealth Using Other People’s Money

How an Emergency Fund Can Save You Thousands Each Year

Financial Planning for Generation X

AFTER You Get The Job

How to Boost Your Cash Flow in Two Easy Steps!

How-to…Personal Finance Edition – Helpful tips from LOTS of different bloggers.

How to Determine If You Are “Wealthy”

Your Net Worth Statement Part I

Your Net Worth Statement Part II

Your Net Worth Statement Part III

Your Net Worth Statement Part IV

Your Net Worth Statement Part V

Analyzing Your Financial Statements with Ratios

An Interesting Read on America’s Wealth Gap

I’ll be honest with you,… I don’t know much about the topic of the supposed wealth divide in America. I mean I’m well aware that we have the rich, the middle class, and the poor. But, other than that, I don’t know much beyond what our media crams down our throats (which I typically take with a grain of salt). Last December I read this Alan Reynolds’ editorial titled The Top 1%…of What? (free) in the Wall Street Journal. He makes a pretty strong case that the numbers that the media and politicians like to throw around are misleading.

We all know that the rich are getting richer. It doesn’t take a genius to figure that out. However, are they getting rich at the expense of the lower and middle classes?

Who Was or Is The Richest Man in the U. S.?

Bill Gates has a net worth of $82 billion. Based on that number, he would be the richest man in the U. S. ever. However, according to Fortune, the richest man ever was John D. Rockefeller. Although his net worth at his death was only $1.4 billion, at the time it represented 1/65 of the nation’s GDP. Bill Gates’ net worth-to-GDP ratio is only 1/152, placing him 5th on the all time list.

Doing some math, we can figure out that today’s GDP is around $12.46 trillion. To arrive at that number, I simply took the inverse of 1/152 (1 ÷ 152) and divided that number into $82 billion. Like this:

$82,000,000,000 ÷ (1 ÷ 152)

$82,000,000,000 ÷ 0.006578947


According to Federal Reserve’s 2004 Survey (PDF), the average household had a net worth of $448,200 (an estimate I think seems too high). This means the average net worth represents 0.0000035960% of the nation’s GDP, while Bill Gates’ net worth represents .66%. NOTE: this is a very rough estimate.

Finally, to put Rockefeller’s net worth in perspective, if Bill Gates’ net worth represented 1/65 of today’s GDP, his net worth would be…


Now I feel really poor!

What’s Your RON (Return on Net Worth)?

While reading Thomas Stanley’s Millionaire Women Next Door, I came across something called the RON or Return on Net Worth. It’s calculated by dividing one’s household income by their net worth (assets – minus liabilities). The formula looks like this:

RON = Household Income ÷ Household Net Worth

The book gives an example of a woman who makes $125,000 per year and has a net worth of $690,000. Her RON would be calculated as follows:

RON = $125,000 ÷ $690,000

RON = .1812 or 18.12%

According to the book, this number tells us that this woman’s household realizes 18.12% of its total net worth annually.

Is this is a good number or a bad number? Would you want this number to be higher or lower? The bigger the net worth is (the bottom number) in relation to income, the smaller the RON will be. In other words, the smaller the RON, the better (as long as the income is sufficient). I would think over one’s lifetime, the RON will be big in the early stages of life and get smaller as we age since our net worth should be growing and compounding over the years.

The author then goes on to make an important point:

For those in a higher income bracket, the lower the RON, the more economically productive the household is.

The typical millionaire who is a business owner or manager has a RON of 8 – 8.3%. That’s pretty low.

Another way to look at it…

Another way to look at the RON, is to take the inverse of the RON:

1 ÷ .1812 = 5.52

This tells us that the woman in the example has $5.52 of net worth per dollar of household income, while the typical millionaire household has $12.50 (1 ÷ .08 = 12.5) of net worth per dollar of income. So, based on those numbers, this lady isn’t doing that great.

To put this in perspective without giving you too many details, our RON is 46.33%, which means that we have $2.16 of net worth per dollar of income. It’s better than nothing but not nearly as good as it could be.


How to Determine If You Are “Wealthy”

Your Net Worth Statement Part I

Your Net Worth Statement Part II

Your Net Worth Statement Part III

Your Net Worth Statement Part IV

Your Net Worth Statement Part V

Analyzing Your Financial Statements with Ratios

JLP’s Question of the Day – Net Worth

In light of yesterday’s post about net worth, I want to pose this question:

Should home equity be included in figuring net worth?

I say yes but I think people should be careful if they live in an area where property values have soared through the roof, which could indicate a bubble. Although we all want our net worths to be as high as possible, they should be a realistic picture of our financial situations otherwise the exercise is a big waste of time.