BFIN 2201: Business Finance
Balance Sheet – Net-Worth Assignment
For a company shareholders’ equity is defined as total assets minus total liabilities. Also referred to as the book value of equity, shareholders’ equity is static that is, it is determined and stated at a particular year in time. In the case of an individual, we refer to an individual’s equity as net-worth.
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May 10, 2010
By RON LIEBER
Joey Kincer is the kind of guy who likes to keep records. Kincer is a 32-year-old Web developer who lives in San Juan Capistrano, southeast of Los Angeles, and among the things he tracks on his personal home page at kinless.com are his collection of action figures based on the Mega Man video games (“Not for sale,” the site warns sternly), the piano awards he received as a child (“My mom kept track of them all,” he says) and a photo gallery of female celebrity crushes that he refers to as his Dream Team.
His highest achievement in record gathering, however, is contained in a Quicken file, where he has tracked his personal finances for 16 years, ever since he was in 11th grade. On a recent Wednesday evening, Kincer punched a few buttons on a keyboard and projected his entire financial history onto a giant screen hanging from the ceiling of his bedroom for me to see. There was the $3.38 he spent on chips and dip on March 16, 1996. A birthday card for a friend a few weeks later cost $3.18. Deposits arrived in small amounts every couple of weeks thanks to a job playing piano at church.
This trove of data came in handy a few years ago when Kincer happened upon a Web site called NetworthIQ, which allows people to record their net worths and display the ups and downs for anyone to view. Most people who share their data do so anonymously, but Kincer posts a link to his personal Web site, where he uses his real name. Kincer especially liked that the site allowed him to compare himself with others. It appealed to the Mega Man player in him. “NetworthIQ is kind of a game,” he said. “Can I get ahead of everyone? Can I be up there with the big shots?”
Net worth is the number you get when you subtract what you owe from what you own. You start with things like cash on hand, retirement savings and home value and subtract your mortgage, as well as credit-card, student-loan and other debts. Net worth paints a bigger picture than income; it rewards the saver and reveals the drain that big borrowers put on their finances. And it vividly reminds people who think only in terms of monthly payments that their debts may be with them for a good long while.
Figuring net worth isn’t hard, and programs like Quicken make it especially easy. Mint.com, a popular personal-financial-management service, introduced a net-worth feature in 2008 that links to credit-card, brokerage and mortgage accounts. The real-time, intraday updates allow people to obsessively check in on the microscopic daily ups and downs of their personal wealth.
The net-worth number, as Kincer found, is more appealing when you have someone else’s to compare it with. We tend to have an intense curiosity about our neighbors and friends, especially those who seem to earn about what we do but spend a lot more. Do they skimp on retirement savings or their children’s college funds? Are they not burdened by student loans? Do they have a trust fund? Have they simply maxed out every credit card they can get their hands on? There’s no way to answer these questions without seeing a breakdown of net worth.
So it should come as no great surprise that the curious are turning up at NetworthIQ to see what other people’s money really looks like. “This was our way of making money a little more social,” said Todd Kalhar, one of the founding executive partners at NetworthIQ, which is now part of Strands, an online-media company whose moneyStrands site competes with Mint. “People had been talking about stocks forever. We wanted to add a bit more context. The guy talking about stocks might have been bankrupt 10 times.”
Joey Kincer’s net worth is about $201,000, much higher than the $120,000 median figure for U.S. families from 2007, the last year for which the Federal Reserve Board released household net-worth numbers. Among NetworthIQ users who, like him, earned no more than an associate’s degree, that makes him a big shot. But when he compares himself with all the people his age and all Californiaresidents, he’s just a bit above average.
He earns about $65,000 a year largely as a Web developer but is determined to save enough money for a substantial down payment on a detached house, not merely a condo or a town home. And he wants to live in a particular area of central Orange County, where housing prices, while lower than they once were, are still a bit beyond his means.
And so he lives with his parents, paying $700 a month and sleeping in his childhood bedroom. There is a Garfield clock on the wall, and above a twin bed is a photo gallery of the Dream Team, including photos of Daisy Fuentes and Hilary Duff in their younger days. He recently put much of his Mega Man memorabilia in storage. “I’m trying to make my room look less like a 10-year-old’s,” he said. It is perhaps not an ideal arrangement for a young, single man. But by living at home, he is able to save $1,500 to $2,000 each month, which allows his net worth to grow at a steeper trajectory than it would otherwise.
Most of the hand-wringing we do around money essentially comes down to two basic questions: How am I doing? And, Am I going to be O.K.? Net worth is a pretty good answer to the first question and, over time, it offers hints as to how things might ultimately turn out. It’s an easy number to calculate and satisfies the desire for a single numerical grade.
But does our almost irresistible urge to rank ourselves against others based on any available data serve as a source of inspiration? Or does it lead to endless striving in search of some ever-elusive achievement? “I think this is a profound problem, this aspect of humans in the West,” said Andrew Oswald, a professor of behavioral science at the Warwick Business School in England. “We’re now extraordinarily rich by almost any standard of human history. But because we are creatures of comparison, it’s harder to get happier and happier.”
Eric Mill wasn’t thinking about his happiness when he created a Web site called Ohnomymoney two years ago. He was thinking in part about societal taboos — and how to thumb his nose at them. The site shows five numbers: his credit-card and student-loan debt, his checking- and savings-account balances and his net worth, which is currently about negative $12,400. The site updates most of the figures automatically every day through a feed from Wesabe, another site, like Mint, that pulls data from personal financial accounts.
At the bottom of the Ohnomymoney home page, there are two sentences of explanation in a tiny font size: “This is Eric Mill’s money. This site made against the advice of everyone who loves him.”
What was their advice? “It’s something they don’t understand, so they assume that it’s risky,” Mill, who is 25, says. “My girlfriend. My family. One friend criticized it from a classiness perspective. He thought it was uncouth to display something like this, though at the time I had a net worth of negative $20,000, so it wasn’t like I was flaunting anything.”
What he was trying to do when he began the site in May 2008, he says, was start a conversation. Since March 2009, Mill has worked for the Sunlight Foundation, a Washington-based nonprofit group that tries to make government workings more transparent. His site turns that notion on himself. “The taboo around talking about money is ill-founded,” he says. “When you’re the only person dealing with it, you’re subject to all of the dysfunctions we all have. If we could all be a little less uptight and more communicative and social about it, we’d be getting better advice, and it wouldn’t be the sort of thing that we stress about privately.”
So Mill’s money is laid bare for the world to see. In the fall of 2008, he became a freelance Web developer. The timing could not have been worse. “I had $3,000 and no firm gigs,” he says, adding that at one point a potential client, after telling him that he had seen Mill’s negative net worth online, tried to lowball him on a job, letting him know that he assumed that Mill probably needed the money. “During that time, my emotional well-being was completely tied to the number in my savings account.”
It wasn’t a happy time, but during this period, Mill figured out how to feel comfortable handling his money. Mill now saves a quarter to half of his take-home pay in a savings account in an online bank, but he is not making as many extra payments as he could on the $20,000 or so in student loans he is carrying, nor does he have any money set aside for retirement. “I put a much higher value on flexibility,” he says. “And I feel like the better investment right now is in me. It’s much more important that I have as much freedom and liquidity as I can.”
Net worth is not precisely calibrated with financial freedom. If Mill used all of his savings to pay down some debt, his net-worth figure would remain the same, but he would have no emergency fund if he lost his job. For this reason, he has come to think of the figure as a number that doesn’t really tell his whole story.
Some financial advisers agree. “To me, it’s an irrelevant number,” says Spencer Sherman, author of “The Cure for Money Madness” and a founder and the chief executive of Abacus Wealth Partners. “If people have a billion in net worth and are spending half a billion in a year, they’re really poor.” After all, they’re on pace to be broke in 24 months. (Sherman’s preferred measure of financial health for retirees is a ratio that compares net worth, excluding home equity, with the amount of money people take from their portfolios each year. He generally doesn’t want clients spending more than 4 to 6 percent of their holdings annually.) Mill acknowledges that his philosophy of financial openness has its limits. “This would be hard for me to do if I was totally affluent,” Mill told me. He balked at revealing his salary for this article, even though some of his friends already know what it is. “I don’t want to cause any tension with my co-workers,” he says, allowing only that the figure was at the upper end of the midfive figures.
I talked to one NetworthIQ user, a South Florida woman, who has about $856,000 in net worth. She blogs about her financial life at adventures-of-sam.blogspot.com, but says she would never reveal her name on the site. She worries that doing so would inject tension into her offline life. Her friends might think she was bragging about her frugal habits or implicitly criticizing their spending. Indeed, talking about wealth or good fortune can seem coarse or boastful, and maybe some people don’t want poor relatives to know to what extent they could be helping — and aren’t.
When Stephanie Grant learned a few months ago that a decent-size income-tax refund was coming her way, she had already dropped out of school twice, run up $37,000 in debt from credit cards and student loans and was the divorced mother of 3-year-old twins. Hers is a catalog of the sort of financial pitfalls that can set young adults back for many years.
Rather than spend the tax refund on the Nintendo Wii she wanted, Grant, who is 31 and lives in Edina, Minn., put it toward paying off her debt. Then, she began tracking her net worth in public, in part to shame herself into sticking to a financial plan, and recorded her progress on a blog, superpositron.blogspot.com. She followed the debt-reduction system of the financial coach Dave Ramsey, paying the smallest loans off first to build momentum. And she posted her numbers on NetworthIQ after seeing a link to it from the forums on Ramsey’s Web site.
“I liked the number it came up with,” she says, noting that her net worth includes her $4,000 or so of retirement savings, the value of her car and her $1,000 emergency fund. “My assets actually made a difference. I don’t have much, but the negative number was less negative than it would have been without them.” This is a common revelation for financial novices: you are more than the sum of your debts.
Initially, the idea of laying herself bare on a blog and on NetworthIQ caused a lot of anxiety. “You’re saying I have a secret and here it is for everyone to see,” she says. “But once it’s out there, and especially now that it’s not just a flat line saying ‘negative $23,000,’ and it is moving up a little bit, there’s a sense of pride and accomplishment that goes along with that. I know people are visiting, and it makes me want to pay something else off so I can post another entry that’s something good.” She’s currently putting a third of her monthly take-home pay from her job as a benefits analyst toward debt payments.
All of this has led to some odd reversals in her life. She looks forward to getting her bills in the mail, for instance, because it means it’s time to update her total debt. “Which might be a little bit sick,” she said. “But I know it’s lower than the last month. I know it for a fact.”
Grant often wonders about the people who are far ahead of her in the NetworthIQ standings. Did they get lucky? Are they lottery winners? Or did they get smart about money before she did? She tries not to beat herself up over it. “For people with the same income as me but higher net worth, it tells me that I can get there, too. It just takes discipline,” she says. “I know it has only been a couple of months now, but I kind of feel like I’ve made a life change.”
She admits that some of her pleasure is fueled as much by competition as self-satisfaction. I’m not that far off from the person right above me” on the NetworthIQ list, she says. “I can probably catch them this month. And maybe next month I can get to the next one.”
That attitude is familiar to Michael McBride, an economics professor at the University of California, Irvine. “We crave information, not just to outdo others but to know how we ourselves are doing,” says McBride, who has studied how people’s well-being is affected when they compare their incomes against those of others. “When I pass out tests, the first thing students want to know is what the mean was. They don’t know how to interpret their score unless they know how well others did.”
Oswald, the professor of behavioral science, says the craving for comparison may be rooted in our biology. “It’s easier said than done to break through two million years of evolution,” he says. “A million years ago, you could watch what others were doing and mimic that to get food and resources. Or if you were high up the monkey pack, you could get the best mates.”
But what, exactly, are we comparing? Numbers like net worth can become inadequate shorthand. “We use it for something it was never intended to be used for: a sense of self-worth and status,” Milo Benningfield, a financial planner in San Francisco, told me. He urges his clients to stop thinking about other people and think instead about what they want and need. “I tell them to think of this as a topography of the choices you’re making about how you’re spending your lives. The only question I have is whether these are the choices you want to be making as you move forward. I think that takes the pressure away from looking right and left to other people around you and focuses it on your own life goals and your own vision of success.”
Joey Kincer, the Web developer who still lives with his parents, has never had a negative net worth. He stayed employed throughout the recession and got a better job near the end of it.
But when the stock market collapsed in 2008 and early 2009, Kincer worried that the holy-grail number he tracked, his net worth, could drop. “My 401(k) was falling,” he says. “It was affecting my net worth, and I didn’t want to see it doing that, so I took other measures to make sure it stayed flat.” He spent less money on eating out, DVDs and electronics in order to keep that public net-worth figure from dipping.
This might seem like a joyless way to live, but Kincer doesn’t see it that way. “I’m social,” he says. “I have friends from all different branches of my life. But I don’t go out that much. If I have the choice to stay home and earn money, I’ll do that. I’ve seen just about every one of my friends struggle financially. They’re killing themselves, and I’m thinking to myself that I’m not going to live like that.”
This article has been revised to reflect the following correction:
Correction: May 16, 2010
An article on Page 54 this weekend about personal net-worth comparisons misidentifies one of the factors typically used as an asset in such calculations. It is home value, not home equity.
BFIN 2201: Business Finance
Balance Sheet – Net-Worth Assignment
- What did you learn from the article?
- Consider each of the following profiles.
- For each profile determine their yearly income, current net worth, and amount saved since the prior month.
|Income||Net Worth||Amount Saved|
- Compare and contrast the financial positions of Syn and SilverAce.
- Compare and contrast the financial positions of Johnnydrama and Brokewallstreeter.
- Do you consider yourself to be a spender or a saver?
- What are your financial goals?
- Complete a full NetworthIQ profile either on the webpage (print and attach) or below (double-clicking will open an Excel sheet).
- Create a hypothetical Net Worth statement for yourself in 5 years.
- What did you learn from your profile?
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