If I ask you to think about your net worth, my guess is that most readers come up with a dollar amount. I suppose that’s reasonable BUT I think about it differently. I start with a dollar amount for the numerator and then divide by my monthly spend rate to arrive at number of months. I know it’s different but let me explain.
The first time I calculated my net worth in number of months was after I left a corporate job. I was wondering how long I could survive until I found a new gig. After I did the calculation, I breathed a sigh of relief. I wasn’t sure how long it was going to take to find a new job but my number measured in years, and I knew it wouldn’t take that long. It wasn’t that my numerator was all that large, but I was single, living in a reasonably priced condo with an older but fully paid off car. Years later, my spend rate is higher but so is the numerator and the resulting quotient. This is a very theoretical number. Realistically, one probably couldn’t liquidate everything and there would be some tax overhand on 401k’s and the like. Still, an interesting benchmark.
Over the years I have come across a number of people who make a lot of money but ultimately have very little net worth to show for it due to extraordinary monthly spend levels. They live “paycheck to paycheck” and are sometimes scrambling to pay credit card bills. They look at the net worth they calculated on their PFS (Personal Financial Statement) that they likely put together for the bank to secure a loan. The bank almost certainly “haircut” many of the line items on the statement. In my opinion, these statements give many a distorted sense of reality.
There are too many useless and squishy numbers on the typical PFS. My favorites . . .
- Personal property. I don’t care what you paid for your TV six months ago. I can get a better one, cheaper, at Best Buy today. And what are you going to do, sell your sofa and bedroom furniture? Unless you have some art or collectables that you can turn into cash (net of auction fees, etc.) the value of most personal belongings is irrelevant.
- Same. I own three cars for just as many drivers. No cash to come out of these unless someone is walking. I value these at zero. On the other side, I do count the amount I owe on one of them as a liability. It’s an obligation that has to be fulfilled.
- Real Estate. This is more reasonable but no overinflated values, please. Long term real estate certainly contributes to your net worth and even though I include it in my theoretical calculation, it’s not exactly liquid and you need somewhere to sleep at night.
- Business value. Like real estate, often overstated and even more illiquid. If you’re a business owner, think about what you have accumulated outside of the business for this exercise. While that business is probably your single biggest asset, you should have accumulated significant assets outside of the stock you hold in a privately held entity.
So, now that you have a number of months of runway, how are you feeling? Relaxed? Good. Panicked? Do something about it!
If your business could benefit from fractional CFO services, I would welcome the chance to speak with you. Please give me a call at (314) 863-6637 or send an email to [email protected]
The archive of these monthly newsletters is posted at the Resources section of homza.com
your cash is flowing. know where.®
Ken Homza
Copyright @ 2025 Kenneth M. Homza