2 Numbers I Use to Measure Success with Money

Don’t get tied down to old ways of thinking

Photo by Woody Kelly on Unsplash

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Pre-Pandemic me: I will feel successful with money when I’ve accumulated as much of it as humanly possible.

Me in 2022: I will feel successful with money if I can do the things I value most in life, work on projects that excite me and not stress about how I’ll pay for things.

Part of this change is driven by the fact that I’ve been fortunate enough to own assets that have increased dramatically in value during the pandemic. But, spending nearly 2-years locked inside while learning how to raise a baby has changed how I look at just about everything in life.

2 flaws in using net worth to measure financial success

Every so often, my wife and I sit down and update the value of our assets and debts and calculate our net worth (assets — debt.)

It used to be the only number I cared about when it came to money, but I now see two flaws that distort the true state of our finances.

1. The outsized role my home plays in my net worth.

2. Our pensions don’t factor into the net worth equation.

We live in a city where home prices have tripled in the past six years. On paper, this makes us much wealthier as the home we bought for $375,000 in 2016 is now worth more than $1 million.

Mission accomplished, right?

As I’ve argued in the past, rapidly rising home prices can trick you into believing your finances are stronger than they are.

You never want too much of your net worth to be tied up in the house that you live in because there are only three ways to spend that money.

1. Take out another loan against your house.

2. Sell, and rent.

3. Sell and downsize/move to a cheaper city.

You may have your opinion on which of these three options makes the most sense on paper, but in reality, they all present unique challenges.

A few months ago, I wrote about why my wife and I are likely going to stay put and not sell the house. The TLDR: We can’t break our current mortgage without massive penalities for a few years.

My wife and I are fortunate to both have Defined Benefit (DB) pension plans. The thing about a DB pension is that it’s complicated to assign a present value to it, so most people who have one don’t include it in their net worth calculations.

I recently took the time to estimate the combined Present Value of our pensions, and it’s in the ballpark of $500,000.

On the one hand, our net worth is inflated by the value of our home and on the other, it doesn’t take into account pensions worth $600,000.

My two new measures of financial success

1. “Accessible” net worth.

2. Income from work I love and control.

Accessible net worth

We already covered why housing prices have created a sort of mirage that allows people to believe they are wealthier than they really are.

That is why I use a modified version of net worth that I call “accessible net worth.”

Accessible net worth = Traditional net worth— The value of your home

If you had a $1 million net worth and an $800,000 house, your accessible net worth would only be $200,000. By removing the mirage of home equity, we gain a much clearer sense of our true wealth.

Your accessible net worth is how much wealth you would have access to if you decided to never sell your house.

This moves me closer towards my new definition of financial success because the higher my accessible net worth is, the less reliant I am on my paycheck to pay the bills.

Income from work I love

In addition to my 9–5 job, I also run a side-business doing something that I love (writing this newsletter) and fills me with energy.

I’ve been doing this for four years, and I can’t describe how amazing it is that I get paid money to do this. In my first month of writing in 2018, I made $15, and I was pumped about it. Today, I make enough to cover my living expenses (on a good month) from writing.

This is the most important financial metric in my life right now. Not only does it open up the possibility of quite literally creating my dream job, but it has allowed me to supercharge my savings rate and substantially increase my accessible net worth.

Both of these measures of success work toward a common goal: financial freedom.

Rather than simply stacking my net worth—which has no clear “off-ramp”—I focus on investing in assets like stocks, bonds, and real estate (that I don’t live in) and income from writing.

If I keep focusing on these two goals, then one day, I’ll get to spend all my time writing without worrying about how I’ll pay the bills.

Wealth is important, but it needs to be more than a number on a spreadsheet.

If having wealth does not allow you to live your definition of a great life, you might need to change things up.

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My hottest article on Medium right now

My Medium article with the most views in the past week is titled “If You Want to Be Wealthy, Don’t Quit Your Day job.” Here’s a link to read it and bypass the Medium paywall.

I’m currently writing an article titled “We’re in a Generational Housing Boom, but It’s the Worst Time in History to Become a Real Estate Agent”. The person who correctly guesses why that is, in the comments, gets a shoutout in the next newsletter.

If you want to follow my writing on Medium click here to get notified when I publish and click here to become a Medium member.

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This article is for informational and entertainment purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.