Why Net Worth is Misleading

net worth is misleading

Photo courtesy of JD Hancock

If you spend any time at all learning about personal finance, you’ll quickly hear the advice to focus on net worth instead of income. Net worth, we’re told, is the true indicator of wealth. I mean, hey, just last week I wrote about the importance of net worth in bringing you closer to what I consider to be the top two financial goals: security and freedom. So it’s got to be a pretty telling number, right?

It is. Of the traditional financial indicators, net worth is the best one at describing a person’s true level of wealth. But it’s not without its flaws, and there are plenty of circumstances where a person’s net worth is misleading. Here are some of the things to consider before making any conclusions about your net worth.

It’s a snapshot in time

Your net worth is a record of your assets and liabilities at a single point in time. No matter when you measure it, the point in time is arbitrary and the value of your assets may be up or down through no fault of your own.

If you have money in the stock market, your net worth will look much different today than it did in 2008, even if you hadn’t made any contributions or withdrawals. Housing prices have had similar wild fluctuations, leaving you with different levels of measured wealth at different points in time.

Net worth is just a number and does nothing to explain the environment in which it’s being measured. Given that you can’t control the ups and downs of the market, your current net worth is partially the result of factors over which you have no influence. Even if you do nothing, it will undoubtedly be different in the near future.

It doesn’t account for the types of assets and liabilities

If you’re working towards financial freedom, whether in the form of a traditional retirement or an early one, net worth is a much better indicator of your progress than income. But it still has a significant weakness in that it loses the details of your specific assets and liabilities, and those details can make a big difference in understanding your future prospects.

Let’s imagine two people with a net worth of $500,000. Pretty impressive right? One of those people owns a home worth $450,000 and has $50,000 in savings/investments. The other owns a home worth $200,000 and has $300,000 in savings/investments. They both have the same net worth, but which one is in a better position to secure their freedom sooner?

All other things being equal, it’s the person with $300,000 in savings and investments. That’s money that can earn you more money (read my article on how to beat 80% of investors with 1% of the effort). It’s also money you can spend. Owning a home has many potential benefits, but it is not earning you money (I’m talking about a primary residence here. Rental properties would fall in the “savings/investment” category.) It’s actually costing you money through taxes, insurance, maintenance and the like, and a more expensive home likely has higher costs. And in addition, your home’s value is not money you can spend, unless you’re willing to either put yourself further into debt with a line of credit or to sell and downgrade to a less expensive house. So the types of assets you own have a significant impact on both their future growth and your ability to actually use the wealth they represent.

On the other side of the equation, the details of your liabilities matter a lot as well. $100,000 of debt counts the same in your net worth no matter where it came from. But would you rather have a $100,000 mortgage at a 4% interest rate or $100,000 of credit card debt with a 15% interest rate? The choice here is clear, but this kind of nuance is not reflected anywhere in your single net worth number.

It doesn’t factor in how you’re adding to it

Just as the types of assets you own dictate their chances for future growth, your own actions have a significant role in growing your net worth as well. I would rather have a $0 net worth but be able to add $25,000 per year to my savings and investments than a $100,000 net worth I couldn’t add to. This is where the dual principles of frugality and earning more come into play. If you want to build wealth, you have to live below your means. And the further below your means you live, the faster your wealth can grow. If you want to accelerate things, your options are either spending less or earning more, or even better a combination of the two. But in any case, increasing the amount you can save is the surest path to wealth generation, and it’s one that is not seen anywhere in a statement of net worth.


Net worth is an important indicator when it comes to measuring your progress towards both financial security and freedom. But it’s just a single number, and there are many variables to consider alongside it if you’re truly trying to gauge your financial position. Make sure you account for the entire picture when planning your family’s future.

Start building a better financial future with the resource I wish I had when I was starting my family. It’s free!
63 Comments... Read them below or add one of your own
  • DC @ Young Adult Money October 30, 2013

    Excellent points, Matt! I think net worth is definitely useful at times, but can be misleading or give an incomplete picture. If you have a net worth of 200k but are not bringing in any income you are not as well off as someone with a net worth of 200k who is making 100k a year. It’s important to plan accordingly depending on those other factors.

    • Matt @ momanddadmoney October 30, 2013

      Exactly. It’s a useful number, but taken out of context it can be misleading. As Mrs. Pop says below, there’s never going to be one number that sums up everything.

  • Holly Johnson October 30, 2013

    I don’t pay much attention to our net worth for a few reasons, mainly because it doesn’t matter at this point in our lives. I do know that we’re saving every month and that all of our numbers are moving in the right direction.

    • Matt @ momanddadmoney October 30, 2013

      Focusing on the steps that will make it grow (saving every month) is much more productive than focusing on the short-term ups and downs.

  • wellheeledblog October 30, 2013

    No single metric can capture everything about your finances, so all metrics can be “misleading” by some account. That’s why you need the cash flow and income statement to get a more complete picture. πŸ˜‰

  • John S @ Frugal Rules October 30, 2013

    Great points Matt! I think it can be helpful to look at, but obviously it can be skewed as you pointed out. Like Holly, we focus (for the most part) on what we’re doing month to month and watch our numbers go in the right direction. I love your point as well to try and combine living below your means and increasing income. So many focus on one side when the combination is the best way to get where you’re wanting faster.

    • Matt @ momanddadmoney October 30, 2013

      We track our net worth monthly but Holly’s point about focusing on the behavior rather than stressing the result is a really good one. It’s the consistent behavior that will get you where you want to go.

  • Simon | Modest Money October 30, 2013

    As skewed as Networth is as gauge of our finances, it does serve another more, shall we say, “pyschological” purpose…that of helping us compare ourselves to what others in our age, region or cohort are doing. Not that we should be comparing, but humans are a curious lot πŸ™‚
    When all is said and done though, living below your means (saving & investing the rest) is the way to lasting wealth.

    • Matt @ momanddadmoney October 30, 2013

      Oh I definitely think it’s important, but not really for the purposes of comparison. Comparing can be interesting, as you say, but it’s not incredibly helpful. But in the end if you want to reach retirement at some point, you will need to have grown your net worth. So it’s worth monitoring and paying attention to its structure to make sure it’s actually helping you achieve your goals.

  • Andrew October 30, 2013

    I absolutely agree that while net worth is a very good indicator, it can sometimes be misleading. One of the reason I try not to focus just on my net worth is because I do have a good amount of student loan debt. I’m not in a rush to pay it off as they are very low interest loans and the degree will probably help me earn more than I would have if I hadn’t gotten it.

    • Matt @ momanddadmoney October 30, 2013

      That’s an excellent point Andrew. Student loans can be a great way to leverage your money for long-term growth. You made a short-term decision to lower your net worth with the expectation that it would lead to greater long-term wealth. Perfect example of how a snapshot in time doesn’t tell the whole story.

  • Alexa Mason October 30, 2013

    I agree. I think net worth is an awful indicator of someones financial success. Someone with a very high net worth could be in a much higher risk situation because of all of the debt they took on. However, someone with a lower to mid range net worth may be in a much better situation because they have all assets and no liabilities.

    • Matt @ momanddadmoney October 30, 2013

      Well I certainly wouldn’t go so far as to say it’s awful. I still think it’s very important, it’s just important to understand it in context of other variables.

  • Kali @ Common Sense Millennial October 30, 2013

    I thought about calculating our net worth the other day, but since we’re so young and only started seriously saving about two years ago (and investing a year ago), I figured there wasn’t much point. I didn’t want to be disappointed by seeing a number that was significantly lower than what other folks in the PF community have shared in the past. Thank you for the reminder that it really is just a “snapshot” of where you are at that exact second, and that there are so many factors that can really change what your number means to you!

    • Matt @ momanddadmoney October 30, 2013

      Don’t be discouraged! The comparisons to other people are meaningless. I would encourage you to track it, not as something to obsess over but just to help you make sure you’re on the right track. It’s kind of like tracking your spending. It’s hard to know if you’re doing the right thing if you don’t even know what you’re doing.

  • Tonya October 30, 2013

    I have to remind myself of this if I ever get depressed at what I earn sometimes. But I also know I have zero liabilities, so although my retirement savings could be better, I at least have that.

    • Matt @ momanddadmoney October 30, 2013

      It’s not about where you are, it’s all about the progress you’re making. Being in a position without any debts is a really nice place to be.

  • Done by Forty October 30, 2013

    So now I have to start considering context in addition to our net worth numbers? Thanks a lot, Matt.

  • Mrs PoP @ PlantingOurPennies October 30, 2013

    We like net worth because it’s a quick and dirty way to track progress, but I think it’s asking too much to expect any one single number to be the answer to “the ultimate question of life, the universe, and everything”. It’s a great starting point, but it’s far from the end.

    • Matt @ momanddadmoney October 30, 2013

      Haha, but wouldn’t it be great if there was such a thing? I like tracking our net worth too, for the same reasons you give. And I especially like it during big bull markets like the one we’ve been in.

  • E.M. October 30, 2013

    Good points, and I agree that net worth isn’t always the best way to look at things. I haven’t bothered to calculate mine yet as I don’t have too many assets besides my savings, and I have my student loans. I have a pretty good idea of how I am doing just by looking at those two things. As long as savings are going up and student loans are going down I’m moving in the desired direction.

  • Grayson @ Debt Roundup October 30, 2013

    Nice article Matt. You make great points as usual. I do look at mine, but I don’t keep a laser focus on it because of the points you made.

  • Kim@Eyesonthedollar October 30, 2013

    Net worth is fun to look at, but it is misleading. I think the most important point is the making more then you spend and using the money you keep in a wise way.

    • Matt @ momanddadmoney October 30, 2013

      I agree. You can control the behaviors, but you can’t always control the results.

  • Kyle James October 30, 2013

    I really like your example. If I owned the 450k home I’d probably downsize and throw the earnings into other investments. I wouldn’t like have that large of a percentage of my net worth in any 1 investment strategy. Especially the turbulent housing market.

    • Matt @ momanddadmoney October 30, 2013

      That’s a big reason why we haven’t bought a house yet. We have enough money, but doing it right would make us far too undiversified and would put a dent in our retirement plans.

  • Walt@ My Wealth Desire October 30, 2013

    I’ll prefer to have a lesser house value but huge net worth. I got your point and I absolutely agree that. The amount of net worth that we accumulated cannot help us to reach security and freedom. Especially, if we link with our prime residence property value.

    • Matt @ momanddadmoney October 30, 2013

      Well I think that our net worth actually can help us build security and reach financial freedom. It’s just that it depends on how it’s constructed. If, as you say, it’s mostly made up of a primary residence, then it’s not very helpful for those things. But if it’s a large amount of savings and investments, then it absolutely is.

      • Walt@ My Wealth Desire November 2, 2013

        Yes, that is true.

  • Jacob @ iHeartBudgets October 30, 2013

    I like net worth because it makes me feel good πŸ™‚

    Except when it doesn’t :

    But you’re right, net worth is a lump sum of all equity, but doesn’t take into account liquidity or interest rates. That’s why it’s just ONE measure of financial progress. Just make sure it’s going up, and you’re good to go πŸ™‚

    • Matt @ momanddadmoney October 30, 2013

      Haha. Yeah it’s a lot of fun when the market’s going up. Not as much fun when it’s going down.

  • Connie @ Savvy With Saving October 30, 2013

    I agree. There’s a lot of other factors to consider. For me personally, since I’m young and have only been working and saving for 3 years, it really doesn’t tell me anything about my financial situation.

    • Matt @ momanddadmoney October 30, 2013

      The one thing you can use it for now is measuring progress. Just like with tracking spending, it’s hard to know how to improve if you don’t know where you’re at.

  • This Life On Purpose October 30, 2013

    Good point. I guess it’s not just about the number but what it represents. I still think it’s a good metric to observe over time, as it (hopefully!) shows progress towards your goals.

    • Matt @ momanddadmoney October 30, 2013

      Oh I definitely agree that it’s helpful to track. It’s just important to understand it in context.

  • Stefanie @ brokeandbeau October 30, 2013

    Some great points here. I’m happy with my net worth given my limited income. My goal is to earn more so I can continue growing it and diversifying my investments to keep it secure when certain market sectors fluctuate.

    • Matt @ momanddadmoney October 30, 2013

      That’s an awesome goal. Keep focusing on those positive behaviors and the net worth will take care of itself.

  • Catherine October 30, 2013

    Like Holly, I also don’t pay attention to my networth. Honesty, I’ve never even tracked it…we’re doing all that we can (paying off non-mortgage debt asap plus increasing income) so it doesn’t really matter to me.

    • Matt @ momanddadmoney November 1, 2013

      Taking positive actions is definitely the most important thing you can do. Nice work.

  • Dear Debt October 31, 2013

    I actually don’t like networth posts. Maybe because I have a negative 43k networth or so? But yeah, that doesn’t account that I had 81k in debt total and I am paying it off ASAP and trying to hustle my way into making more and getting that into the positive.

    • Matt @ momanddadmoney November 1, 2013

      Right on. The direction you’re heading is more important than where you are right now. Sounds like you’re on the right track.

  • Shannon Ryan October 31, 2013

    Great post, Matt! Absolutely knowing your net worth is important but like you said it doesn’t give a complete picture. In some instances, it can make you seem better off than you really are. I know I always come back to goals but that’s what I believe in. Knowing what your goals are and how you much money you need to fund them, then tracking your progress to achieving them.

    • Matt @ momanddadmoney November 1, 2013

      Yep, goals are really the foundation of everything. Net worth, or any measure for that matter, is pretty worthless if there isn’t a purpose behind it. The same amount of money could make one person rich and one person poor.

  • Same as Holly, I don’t like to look at my net worth, only because its so much in the negative from my student loans. However, since graduating I’ve put several good habits into practice and am digging my way out impressively fast. Sometimes it doesn’t feel like fast enough though. However, even though my current situation in time looks gloomy (I love what you said about how its only your current situation for this moment in time), my solid habits will carry me though and even on a day to day, month to month basis, I’m in a great financial position. I’m not going in and out of credit card debt, living beyond my means, or always wanting material items to fulfill my needs. To me, that puts me in the greatest long-term financial situation of all, despite my moment-in-time net worth.

    • Matt @ momanddadmoney November 1, 2013

      I totally agree. Good lifelong habits are really the cornerstone of success. Many people will put too much emphasis on their current situation, whether good or bad, and that’s really missing the point. It’s all about how your current actions will get you where you want to go.

  • Emily @ evolvingPF October 31, 2013

    Very good points. If you only get one number, net worth is a good place to start, though without a bit more context it’s not terribly useful. But with a handful of numbers you can probably get a decent handle on someone’s finances.

  • Free Money Minute November 1, 2013

    Nice article Matt. At first glance after reading the title I was going to have to disagree with you. However, you did clarify that net worth is important, but it can be made up of different components which is also important. Thanks again, I enjoyed the read.

    • Matt @ momanddadmoney November 1, 2013

      Thanks a lot. I definitely think it’s important. It’s just that the number alone never tells the whole story.

  • Roger Wohlner November 3, 2013

    Matt great post and I agree that net worth is a snapshot in time, just like a corporate balance sheet. I also agree that the “quality” of one’s assets and the make-up of their liabilities is vital. Net worth is still and important number and should be tracked over time for both raw growth and changes in the composition of the assets and the liabilities.

  • MoneySmartGuides November 8, 2013

    I track my net worth every month. I agree that the number is just a snapshot of a point in time, but I like to look at it over a period of time to see the trend of how I am doing. I regularly invest each month and as long as my assets are increasing each month and my liabilities are going down, I know I am in good shape.

    • Matt @ momanddadmoney November 8, 2013

      I track ours every month as well, for the same reason. But how will you feel when your assets decrease even though you kept up your contributions, simply because the market decreased? The long-term trend is important, but even the month-to-month changes can be very misleading.

  • Anton Ivanov November 16, 2013

    Very insightful post, Matt. I’m a big fan of net worth, but you make a good point that it doesn’t always paint the whole picture.

    I just featured this in my latest roundup!

    • Matt @ momanddadmoney November 17, 2013

      Thank you Anton. I think net worth is a powerful indicator as well, it just needs to be understood in context.

  • Dan Meyers November 19, 2013

    I think net worth is still the best number to track even if it does have some flaws. As Simon mentioned below, it does have a great psychological impact to see your net worth growing (and hopefully not fallling) over time…. but it can also mess with your head with the stock market starts to drop again!

    • Matt @ momanddadmoney November 19, 2013

      The stock market can make you feel great and it can make you feel terrible, if you give it any weight. The reality is that we’ll be most productive if we can focus on consistently practicing good habits and not worry too much about the ebbs and flows of the results.

  • Alicia November 27, 2013

    I definitely agree. Net Worth can also be swamped out by big amounts like your house and mortgage. Yeah it is great to own your home, but like your example, I’d much rather have the lower-cost home and the larger savings/investment account than be house-poor!

    • Matt @ momanddadmoney November 27, 2013

      It’s all about having assets and liabilities that meet your goals. That’s going to mean different things to different people and can’t be summed up in a single number.

I’d love to hear from you, please leave a comment