An Alternative to Networth

by Mr. Cheap

I personally have no problem with it, but many people in the personal finance blogosphere seem to have objections to networth as a measure of wealth (and especially whether to include your principal residence in the calculation, Mike and I even disagree on this one).

While re-reading “The Millionaire Next Door”, one idea they mention in passing is that one view of “your wealth” is the length of time you could go without working (i.e. without receiving a paycheck). I thought this was an intriguing idea, as it factors in your spending and lifestyle as well as your assets.

The calculation would simply be: (assets – liabilities) / monthly spending.

As an example, my assets (after subtracting liabilities), including cash, stocks and my investment condo were worth about $87,318 as of June 1st (I’d also consider this my networth). Since I’m living on about $1300 / month, I could go for about 67 months ($87,318 / $1300), or 5.5 years without working (BIG IF: my living expenses didn’t increase and my assets didn’t decrease in value).

Alternatively, you could use assets / monthly spending (including debt servicing) if your liabilities are greater than your assets (and having a negative number would bum you out).

I especially like this calculation as it favours my approach to life :-). I’d be significantly higher on the networth ranking of PF Bloggers if we factored in lifestyle costs.

Factoring in the principal residence is still a tough issue, as selling it would probably INCREASE your monthly expenses (since you’d have to rent something comparable). *sigh*

How long could you go without receiving a paycheck? What do you think of this measure of wealth compared to networth? Any ideas for what we should call it?

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