Let?s get something straight: absolute numbers matter very little in personal finance. ?Relative numbers, on the other hand, are critical.
Example: you decide to retire because you have built a dividend stock portfolio that spins off $20,000. Not too shabby. ?The problem is that your annual expenses in retirement are $30,000. ?Time to start dipping into that savings account right? ?Or trimming your lifestyle a bit. ?Isn?t retirement grand?
This simple mathematical principle is why I don?t care (and neither should you) about what the latest Hollywood star is blowing their cash on. ?I get it, there is a little part of you that gets some guilty pleasure out of seeing their failures plastered all over the covers of tabloid?magazines?at the?checkout?line while at the same time you just?wish you had their money. ?After all if Justin Beiber made his millions by combining a bad haircut with arguable vocal talent then surely a hard-working soul like yourself still has a shot at the big time. ?Until you get there you?ll deal with your feelings of envy by buying?another purse (this goes for women and, regrettably in this day in age, for men as well) from some Italian designer. ?Yet you do so at your peril because Paris Hilton (am I behind the times here?) is permitted, in the financial capability sense, to have twenty of the damn things if she wants. ?You, with your five-digits or or more worth of debt in some sort or another don?t.
There I go being mean again. ?Last week my disregard for someone?s feelings prompted this amusing Twitter conversation which I was only privy to because the parties involved tagged me in it:
And this?
Just so we are clear I don?t pick on this particular blogger on purpose, it?s more of a gift that keeps on giving kind of situation. ?To her credit she did not add to her debt in order to go on the trip (see, I can be fair and nice)?she just put off paying the debt she already had. ?Awesome ROI right there.
Anyways that brings me to my point: the greater your net worth the more money you can blow on stuff that won?t increase your net worth. ?When your net worth is above, say, $1,000,000, and you don?t have any consumer debt (I?m hoping that at that point you will have paid off any student loan debt) then dropping a few grand on a vacation is not that big a deal. ?In particular a $5,000 vacation would cost you 0.5% of your net worth. ?Even if you had an annual return this year of 1% on your net worth you could still afford the vacation and continue to get richer.
On the other hand if your net worth is say, $50,000 that vacation is going to cost you 10% of your net worth and you?ll have to grow your net worth by 11.11% just to get back to where you started. ?Throw in say $20,000 of debt and now your net worth of $30,000 just declined by 16.7%. ?To get back to $30,000 you?ll need to pay down your debt as well as the interest accumulated on that debt and in the meantime your wealth building activities are essentially on hold. ?Granted you could accelerate the process with investments but that is predicated on the assumption that your investments will beat the guaranteed interest rate you will be paying on your debt. ?It?s doable but not a high probability move for most people.
So, to make this a little more real, visit the offended blogger?s site to find out how much she spent on her European vacation and then come up with a reasonable estimate of how it compares to her net worth as a whole. Then consider that my own net worth is a smidge under $140,000 and the trip to Maui that my girlfriend and I are on right now (behold the wonder of the ?Schedule? feature in WordPress) is costing me a little under $900?depending?on where we end up eating. ?That comes out to about 0.6% of my net worth: do you think I hindered my wealth building at all?
It is one thing to write about personal finance?because?you have a passion for it, it is another thing entirely to write about it and then?put it into?practice correctly. ?Take it from someone who has started the whole wealth building thing relatively recently OR, even better, take it from a couple of people who have accomplished what they preach: your net worth matters.
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Source: http://6400personalfinance.com/2012/09/03/your-net-worth-matters/
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