Tangible Net Worth is a measure of your wealth that you can use to measure your financial success.
There are some advantages and disadvantages to using Tangible Net Worth as a measure of your financial success.
Advantages of Tangible Net Worth to measure financial success
Tangible Net Worth allows you to measure the value of your assets. It is also a simple calculation to make. This makes it easy for anyone to understand how wealthy they are and to compare themselves to others.
In a way, tangible net worth is a measurement of success. If you own your home outright, have an investment portfolio or retirement savings and have paid off your credit cards, your tangible net worth will likely be higher than if you still owed money on your mortgage or had large debts.
A high tangible net worth can also put you in good stead with lenders. Having more assets can give a lender the confidence to loan you funds because, should you default on the loan, the lender can seize your assets and sell them to recoup some of the money owed.
Disadvantages of Tangible Net Worth to measure financial success
The main disadvantage of using Tangible Net Worth as a measure of your financial success is that it does not include some important assets. For example, if you have an expensive car or house these will not be included in the calculation because they are not cash or liquid assets that can easily be converted into cash.
A second disadvantage is that if you have a lot of debt you may have negative tangible net worth even though you have valuable assets such as property, cars etc.
While tangible net worth may be a measure of success, it’s not necessarily a true measure. For example, someone who has a large debt outstanding may actually be more successful financially than someone who owns their home outright but has no savings or investments.
The person with the outstanding debt may have invested all their funds into building their business and generating income for themselves and their family, whereas the home owner may be facing financial difficulty because they aren’t earning an income but are still incurring costs such as property taxes and insurance premiums.