Why your net worth isn’t as useful as you think

by The Darwinian Doctor

Last week I published our net worth.  But the concept of net worth isn’t as useful as you think, for the following three reasons:

  • The wealthier you are, the less accurate net worth becomes.  
  • Net worth alone can’t buy financial independence.
  • High net worth doesn’t mean you’re trustworthy.

This post may contain affiliate links.

Last week I broke down the different components of our net worth, which as of September 2020 was $3.047 million.  At the end of the article, I teased that I don’t actually love the concept of “net worth.”  Today I’m going to explain myself.

The purpose of your net worth

Let’s put my situation aside for a minute and examine the purpose of “net worth.”  In general, people use their net worth to know how rich they are compared to their peers. In the world of personal finance, it’s just a bit more nuanced.

Here are a few big reasons why you or society might want to know your net worth:

  1. To know your wealth
  2. To know how close you are to financial freedom
  3. To judge your trust worthiness

Unfortunately, I don’t think “net worth” is that useful for any of these purposes.  Here’s why:

Net worth and your wealth

Many people use net worth to determine how wealthy they are.  In fact, it’s the most common yardstick to compare the wealthiest people on earth.  

The problem is that it becomes increasingly difficult to accurately calculate your net worth as you gain wealth.  

For example, let’s say you’re just starting your financial journey and have one credit card, one checking account, and a car loan.  Your net worth is a simple calculation.  Just take your checking account balance and subtract your credit card debt and the car loan.  

But let’s say you’re Jeff Bezos, the wealthiest man on earth (in late 2020).  Now, the vast majority of your wealth is concentrated in a business.  The worth of that business changes daily.  The business itself has lots of assets and liabilities.  

You also own a lot of real estate.  The worth of your property is subjective, and is only worth what someone is willing to pay for it.  You’ve also got a lot of other securities and stocks, and again, the value of this all can change in a heartbeat.  

In my case, I shared last week that the Zestimate of our primary home is $2.8 million.  But I think Zillow is wrong.  When I look at their data, it’s pulling in comps from a much ritzier neighborhood a couple of miles north.  I think the actual value of our home, based on local historical sales, is about $2.25 million.  So the net worth I shared last week is probably off by at least a half million dollars!

Do you feel deceived?  Dismayed?  You’re not alone. A lot of people get really upset when the reality of someone’s wealth doesn’t fit with the perception of their net worth.  

So that’s problem #1 with net worth:  the wealthier you are, the less accurate net worth becomes.

Net worth and your financial freedom

It’s also problematic to use your net worth as a mile marker on your journey to financial independence. 

This is a common mistake in the FIRE community, where there’s a lot of focus on gathering assets to retire from a typical 9-5 job.  

Based on data from the Trinity Study, you’re financially free when your stock portfolio is worth 25 times your annual expenditures.  The data suggests that in almost any time period, it’s safe to withdraw 4% a year from a well diversified stock portfolio and not run out of money after 30 years. 

I’ve done these calculations based on our own (substantial) expenditures, and my original 15 year plan to morbidly obese financial independence was based on our stock portfolio alone.  

Check out my original calculations that showed a target of $10.8 million needed to reach financial independence!  

But while accumulating a nest egg, it’s often really tempting to lump in the value of assets like your primary home into your calculations.  Even the very user friendly retirement calculator on the Playing With Fire website uses the term “net worth” to describe assets, instead of the more specific term “securities” or “stocks.”  This is a very dangerous confusion. 

If I quit my job based on the Zestimate of $2.8 million for our primary home, I’d be in for a world of hurt when I went to cash out.  After adjusting the sales price to the $2.25 million supported by the market and subtracting out broker fees, we’d walk away with a half million dollars less than expected.  

But even index funds have issues for supporting your life of financial independence.  As I’ve argued in the past, you need to convert stocks to cash to actually use it to pay for things like avocado toast and oat milk lattes.  Unless you’re going to live on your Roth IRA alone, the conversion of stocks to cash inevitably incurs a tax hit.  

For example, we recently converted $200,000 of stocks from our taxable accounts to divert to real estate.  Because of capital gains, we’ll likely see about a $20,000 tax bill from this transaction.  

Read more about my real estate investing adventures.

So to sum it up, net worth isn’t a great number to use to track your progress towards financial freedom.  You’re better off using stocks (or rental income).  Even then, you have to make sure to account for the costs associated with liquidating the stocks to cash.  

So that’s problem #2 with net worth:  Net worth alone can’t buy financial independence

Net worth and trust

Last but not least is the connection between net worth and trust.  This was the reason I tabulated our net worth last month — a bank wanted to know this to see if we’re good candidates for a loan.  Could they trust us with yet another mortgage loan?

More generally, you might be tempted to view someone as trustworthy if they have a high net worth.  She’s worth a lot of money, so I can trust her, you might think.  

But is net worth a useful number for this purpose either?  

I don’t think so.  Just because you have a high net worth doesn’t mean you have morals or ethics.  There are plenty of unscrupulous characters that have a high net worth due to good luck, family money, or plain old lying.  

Luckily for our society, most banks use additional factors such as debt to income ratio to judge creditworthiness.  This system broke down leading up to the 2008 financial crisis, but it’s improved a lot since then.  

So I’d caution you away from using net worth as a surrogate for trustworthiness. Most people who boast publicly about their net worth are likely not worthy of much trust at all. (I see the irony here, of course.)

That’s problem #3 with net worth:  High net worth doesn’t mean you’re trustworthy.


We’ve established now that your net worth isn’t as useful as you think it is.  As you grow wealthier, net worth becomes less and less accurate.  It’s probably not the best number to assess your proximity to financial independence.  And it certainly shouldn’t be confused as a proxy for someone’s trustworthiness.

So what’s it good for?

As long as you recognize its limitations, it can be a rough measure of financial progress from year to year.  If your net worth is growing, it’s generally a good thing.  That’s it!


Do you agree with all this, or am I not giving net worth the respect it deserves?  Comment below and please subscribe for more posts!

Want to support the blog?

You may also like

Notify of
Newest Most Voted
Inline Feedbacks
View all comments
3 years ago

For me I don’t include several things in my net worth calculations. I take out the primary residence (which I fully own) and also don’t include items such as jewelry, vehicles, or my daughter’s college fund).

What is left is typically income producing assets that give me a much better indicator of the support I can get from them in retirement.

Financial Samurai
3 years ago

Yes, a net worth is more of a fun vanity measure. But it’s still useful for estate planning purposes.

I’d just manual input your net worth and ignore Zillow’s estimate if it really is that off. Best to be conservative and surprise on the upside instead.


3 years ago

I like the concept of liquid net worth that only counts cash, stocks, bonds, money market, CD’s and other things that are fungible and can be liquidated almost immediately. But I agree it doesn’t tell the whole story. For instance, my Social Security income ,which I’ll take in five years, will be equivalent to a 4% withdrawal rate on a 1.6 million dollar nest egg and it doesn’t add a cent to my net worth on paper. My wife gets a small pension that equates to another $90K of a nest egg, its not counted either in any net worth calc.

3 years ago

I recently found this blog and appreciate your willingness to share your journey towards achieving financial success.
I am also a physician approaching my 50’s and am trying to determine my future path.
I currently own 5 industrial buildings which generate 10k/month each. Own my primary residence, Already have money set aside for my kids education, and have 3 million in stocks and 1.5 million in a 403b.
The thought of diversifying into residential real estate is something I have considered in the past and I appreciate you giving the details on your experience.


[…] I can see my up-to-date net worth anytime I want with a quick login to my Personal Capital app. The Darwinian Doctor doesn’t think the figure is all it’s cracked up to be. Why your net worth isn’t as useful as you think. […]

3 years ago

While I think there’s some good, healthy reasons to track net worth for internal reasons…

…to your point, it’s more questionable for external reasons.

We went through similar pains deciding if we’d share our financial details (we since have).

However, the primary motivating factor for us is one you didn’t mention:

It let our readers have an additional point of (healthy) comparison, understanding, and relation to us.

For example, if you you’re aiming for LeanFIRE and $800K for a couple to retire on, you might not relate well to writer who is aiming for FatFIRE and $5M.

The broad strokes of advice will be similar, but the details and personal anecdotes will probably be pretty different—if not outright unrelatable.

Anyway, I think that’s a big reason to consider it as a writer.


Impersonal Finances
3 years ago

I agree with that–once you reach a certain point it’s really just a number. But before most people get to that point, it’s a great way to gamify progress, especially for those in debt. It can feel like you’re throwing your money away when you’re paying down debt, but to see the impact that has on your net worth is a huge motivating factor. It’s really more about the journey and keeping yourself on track.


[…] I published this post, I wrote that your net worth isn’t as useful as you think.  Although it’s one way to keep track of general trends, I believe net worth becomes less […]

net worth
9 months ago

I find myself utterly captivated by your words, immersed in your perspective, and inspired by your ideas. Your ability to convey complex concepts with such clarity and grace is nothing short of awe-inspiring. I am truly grateful for the opportunity to read your work, as it not only informs and educates but also ignites a deep appreciation for the beauty of language and the limitless possibilities of the human imagination. Thank you for sharing your brilliance with the world; I eagerly look forward to every word you write.

profile-pic (4)

Hot off the press and on sale for a limited time!

My eBook will give you the tools to get started on the path to financial freedom. Learn about my financial journey and the shockingly simple math behind financial independence. Then find out how to define your Why to fuel your success!

Don't Miss A Post

A Darwinian Disclaimer

Since everyone is different, it may not be appropriate to generalize my doctorly advice to your own situation. Please run all medical, life, and financial advice by your own physician or financial professionals before applying it to your own life! Consider all information for your entertainment only!

Images and Copyright

To the best of my knowledge, the images used in this blog are either taken by my own camera, free stock photos, or considered allowable usage under "Fair Use" law. Please let me know if you believe otherwise.

Affiliate Policy

Affiliate Policy
As you explore the site, you may notice links to goods or services. I may earn a commision if you use a link to purchase any of these. While this blog is really just a labor of love and a creative outlet, if I can "keep the lights on" with affiliate links, all the better. Rest assured any reviews you read here represent my unbiased opinions, and there is no added cost to you to utilize the links. Please go here to read my full Affiliate policy.

Evolution Holdings LLC
All rights reserved.

@2024 – All Right Reserved.

Would love your thoughts, please comment.x