Monday, March 12, 2007

Why Net Worth Is A Poor Measure of Wealth

Author: Nick
Category: Money

Abacus by michelini -

Ask any person with a modest level of financial education the question “How wealthy am I?” and you should expect the following question in return: “What’s your net worth?” That’s because net worth is the most commonly recognized measure of wealth. And it’s perhaps the easiest the calculate:

Net worth = Sum of all assets – Sum of all liabilities

It seems to work pretty well, too; few would argue that a person with a net worth of $327 million isn’t wealthy, and just about everybody would have a hard time applying the same label to a person with $100,000 in credit card debt and not a penny in the bank. Since the invention of money thousands of years ago, net worth has been seen as an accurate way to determine if a person is rich, poor, or somewhere in between.

How dare I pose such a headline to this article when even the IRS sees fit to use net worth as the measure of wealth? My reasoning for claiming that net worth is a lousy way to determine your wealth is simple: money is only a small part of one’s total wealth picture.

Let that soak in for a minute. Okay, a minute’s up. Time to shock the daylights out of you rich people: having a high net worth does not make you wealthy. Oh, and I have some good news for you low net worth types: having a low net worth does not make you poor.

I’ll give you some examples of what I mean when we play America’s fastest growing wealth-analysis game show…

which person is richer?

Let’s learn a bit about today’s first two contestants on Which Person Is Richer?:

  • contestant 1 - single motherContestant #1 is a single mother working two jobs and going to nursing school part time. She’s ridden with credit card debt, but she’s working hard and has a plan that’s put her on track to be debt free in just a few years. Net worth: -$33,000.
  • contestant 2 - poor boy from burundiContestant #2 hails from Ngozi, Burundi, considered by many to be the poorest country in the world. He has no home, no job, and he often doesn’t know when he’ll get his next meal. But at least he’s debt-free! Net worth: 25 cents.

Now it’s time to see how our studio audience voted when we asked them which of our two contestants is the richer person:

which person is richer? contestant 1 - 91, contestant 2 - 9

Aw, that’s a shame. I guess you can’t be richer than anyone when you don’t have two sticks to rub together. What do we have for today’s winner, Johnny?

Today’s winner will go home with a lifetime supply of rice! Rice–it may be tiny, but it can keep you from starving to death!

Thanks, Johnny. I’m sure our contestant from Burundi could’ve really used that rice, too. Oh well! Let’s meet our next two contestants:

  • contestant 1 - dictatorContestant #1 is a multi-millionaire dictator of a small Central American nation. Most of his family has been killed in assassinations or rebellion attempts. Now he’s fleeing for his life, spending every night in a different Motel 6 to hide from his enemies. Net worth: $85 million.
  • contestant 2 - family manContestant #2 is an upper middle class American family man. He’ll be turning 40 next month, he has $100,000 in the bank saved for his kids’ college, and his 401(k) just hit $300,000. He’s in perfect health, and he loves his life! Net worth: $520,000.

Wow, that’s quite a life you’ve been living there, Contestant #1. Let’s hope you make it out of our studio alive! And speaking of studio, we asked our studio audience to decide which of these two contestants is richer, and here’s what they said:

which person is richer? contestant 1 - 17, contestant 2 - 83

Ouch! Looks like having millions of bucks can’t buy happiness for poor Contestant #1. What do we have for Contestant #2, Johnny?

It’s a free session of plastic surgery! Whether you want to look ten years younger or just hide from the people trying to kill you, this plastic surgery is sure to change the way you “face” the world.

Ha ha ha! Looks like that’s all the time we have today on Which Person Is Richer? Tune in next time when we find out who’s richer: a hunchbacked circus clown or MC Hammer.

Hopefully you get my point by now.

Certainly these are atypical cases, but they are instances where the net worth model of wealth determination completely falls apart. If using net worth to compute richness fails so badly some of the time, it’s reasonable to assume that it might have some shortcomings for the rest of us.

Tomorrow we’ll look at my proposal for a more appropriate assessment of one’s financial status that I like to call the Total Measure of Wealth™.

(Trademarked for when I score a book deal out of this.)

Friday, March 9, 2007

How Much Will You Save With the Longer Daylight Saving Time? About 86 Cents.

Author: Nick
Category: Money
Topics: , ,

no, sunset, you have to wait another hour

As if you don’t already have enough trouble getting up in the morning, Daylight Saving Time is starting three weeks early this year. The reason: more daylight in the evening will save the U.S. 100,000 barrels of oil a day.

Or will it?

The change moves sunrise and sunset each an hour later, shifting an hour of daylight from the morning to the evening. That means you’ll need one hour less of lighting each night which could translate into savings on your energy bills. At least that’s the rationale behind the clause of the 2005 Energy Policy Act which extended Daylight Saving Time by three weeks in the winter and one week in the fall.

But will the extra Daylight Saving really mean savings on your energy bills for the three weeks in question? For some, it may. For many others, I expect the change will have no impact or end up costing more in the end. Here’s why:

Why An Early Daylight Saving Might Cost Your More

  • That extra hour of daylight isn’t coming from nowhere. No act of government can lengthen a day. All that’s happening here is that an hour of morning light is becoming an hour of evening light. So instead of having your lights on for an extra hour each night, you’ll simply have them on while you’re getting ready for work each morning.
  • Schoolchildren in the dark. With sunrise pushed back so late, some kids may be waiting at their bus stops in complete darkness. You can bet a lot of worried parents will either wait there with their gas-guzzling SUVs running or simply drive them in for a few weeks.
  • Software reprogramming. You Microsoft Windows users out there likely received a software patch for the earlier Daylight Saving start without realizing it, but Microsoft probably spent a good bit of money putting that patch together. Likewise many other computer systems will require adjustments to their calendars, and those adjustments often come with a hefty price tag for software makers.
  • Schedule changes. Some businesses will have to alter their operating schedules to compensate for the earlier change in daylight. Airlines have already complained that flight rescheduling will cost them millions.

Ignoring all of these factors, and assuming you use the same amount of lighting in the morning that you normally do, how much can you expect to save thanks to an extra hour of evening daylight for four weeks? Not much. Let’s do the math, assuming you have five 60-watt light bulbs you regularly use every evening:

28 days * 1 hour * 5 light bulbs * 60 watts = 8.4 kilowatt-hours (kWh)

Using the average residential cost per kilowatt-hour of 10.22 cents from November 2006, here’s how much you’d save:

8.4 kWh * $0.1022/kWh = $0.86

So after an act of Congress, millions spent in computer reprogramming and schedule adjusting, and kids waiting for buses in pitch dark, you can expect to save 86 cents a year thanks to the extension of Daylight Saving Time. And if your house already made the switch to energy-saving CFL bulbs like we did, cut that savings to 19 cents.

I feel richer already and Daylight Saving doesn’t even start until Sunday.

Thursday, March 8, 2007

Punny Poll #18: Your Biggest TV Purchase?

Author: Nick
Category: Money
Topics: , ,

did you spend 3000 dollars on one of me?

In the previous Punny Poll, you were asked if you expected to make more money in 2007 than you did in 2006. A third of you (32%) gave a flat-out no. This means you’ll actually be making less money in 2007 once you adjust for inflation. The same goes for the 22% who said they’d make up to 4% more; that 4% probably won’t cover the rising cost of goods and services. A little over a quarter of voters said they’d make 4-10% more, and I’d say that’s a healthy goal. Almost 20% expect 2007 to bring a jump in income greater than 10%.

I expect to fall in that 10%+ group thanks to a nice raise at work and lots of side income from my hobbies like Punny Money and exotic dancing stamp collecting.

Earlier this week I commented on our nation’s recent obsession with very big TVs that cost Americans $11 billion last year alone. I’m curious as to how much of that $11 billion might have come from Punny Money readers.

What is the largest amount you have ever spent on one TV set?

View Results

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Wednesday, March 7, 2007

Sign #32 That You Should Buy A New Mixer: It Is On Fire

Author: Nick
Category: Money
Topics: ,

if the mixer is on fire, you should get a new one

I think it’s time for us to get a new mixer. My wife just sent me the following note:

I think we need a new cake mixer. Yeah, the inside of it lit up and burnt for a split second (a tiny flame inside) so I turned it off and it went out.

To review, it’s probably time to buy a new mixer when one or more of the following occurs:

  • The inside of it lights up.
  • It burns for a split second.
  • There’s a tiny flame inside.

This post is dedicated to our mixer. R.I.P. 1991-2007.

Tuesday, March 6, 2007

How Much Gigantic Television Can You Afford?

Author: Nick
Category: Money
Topics: ,

do you really need a tv this big?

Part of the American Dream has always been to own an incredibly large television. More and more these days, families are taking trips to their local electronics superstore “just to buy season six of Buffy the Vampire Slayer” and end up coming home with a 47-inch plasma TV with six-speaker surround sound and a gold-plated HD-DVD player. The price tag of these purchases is staggering; consumers in the U.S. spent $11 billion on LCD TVs last year.

Before you rush out to pick up your own oversized talking picture box, you should take into consideration a few things:

  • How much money do you have?
  • How much money do you make?
  • Can you really afford a massive high-definition TV?
  • Probably not, so put that credit card back in your wallet.

standard normal people tv

Unfortunately for our debt-riddled society, TVs are one of those items that people feel is a necessity. Thus they often don’t think twice before dumping X number of dollars on a new one, even if the old one is working just fine. But since we live in an “iPod Nation” where acquiring the latest gadgets regardless of price comes before things like financial security or intelligent thought, people will continue to buy large TVs they don’t need, can’t really afford, and shouldn’t watch as much as they do.

If you’re fully convinced that you need a new TV, and nothing I say can stop you, I hope you’ll use the following process to help guide your purchase.

Determining How Much Television You Can Afford

First, you’ll need to answer a couple of questions about your TV habits.

  1. Do you currently have a working television?
  2. How much television do you watch each day?

If you answered yes to #1, then stop reading this article because you don’t need a new TV. If you answered no to #1, or if you originally answered yes but have since taken an ax to your TV just to change your answer, then continue.

Now if you answered less than 2 hours a day to question #2, you’re not watching enough TV to justify spending $1,000+ on something larger or newer. And if you’re watching 2 hours or more each day, then you’re watching too much television and shouldn’t own one in the first place, let alone buy another.

Everyone should have been eliminated by their answer to #2, but if you cheated and are already on your way to the TV store, consider this formula to help you determine how much television you can afford:

Your annual television purchase budget should not exceed 0.1% of your family’s gross annual income.

So if you and your spouse are making a combined $100,000 salary annually, your TV budget each year should be $100,000 x 0.001 = $100.

This doesn’t mean you should purchase a new $100 television each year, and it doesn’t mean that a pricey high-def TV is out of your reach. If you only purchase a new TV once a decade, you can pool your yearly TV budgets. That $100 a year means $1,000 every ten years, and there are some nice LCD or plasma TVs that can be had at that price.

A few more points:

  • Pay for the TV with cash or a credit card you pay off every month, or don’t buy one.
  • If you have any form of non-mortgage debt, do not buy a new TV. Pay off your debts first.
  • When you find yourself having to choose between putting food on the table and buying a new TV, please buy a new TV so you starve to death and do us all a favor.

Here’s a visual guide that’ll show you the kinds of TVs you can expect to afford given your financial situation. Please feel free to print it out and take it with you on your next trip to buy a television.

If your home looks like this… And your bank account looks like this… You can afford this TV…
really big house money bin jumbotron by Dan4th
average home pile of money respectable lcd tv
not a home one cent not a tv