Not All Assets are Created Equal – Introducing the FI Net Worth

Your net worth

We should start once again with what is your net worth. It is the sum of your assets minus your liabilities. Your assets are what you own. Your liabilities are what you owe to other people. So, in other words, your net worth is what you would get if you were to sell all your assets and pay out all your debts.

Your net worth is highly tied to Financial Independence. One of the main ways to reach FI is to have enough net worth invested to cover expenses every year. Once your net worth is bigger than your yearly expenses multiplied by 25 (for a withdrawal rate of 4%), you are financially independent. This amount of money to become financially free is called the FI number. The FI number is different for everybody.

Your yearly expenses are important. You can subtract the amount of income you will still have in retirement from them. If you receive a pension of 1000 USD per month for life, you can subtract $12,000 from your yearly expenses. Only then can you multiply by 25, based on the withdrawal rate you have chosen, because you do not need to cover these expenses with your investments!

Your FI net worth

In this article, we are mostly interested in the assets part of the net worth.

To reach Financial Independence (FI), you want to reduce your debts. But for FI, all the assets are not equal. Some assets will not help you as much as others to sustain your expenses once you are financially independent.

Therefore, we need to introduce something new: The FI net worth. Your net worth is all your assets minus your liabilities. Your FI net worth is all your assets that help to reach FI minus your liabilities. You will see that some of your assets are highly tied to your FI number.

Some people do not include some assets in their net worth. But I believe that the net worth calculation should be complete. However, if you want to reach FI, you should make a distinct calculation of your FI net worth.

Cash

Cash is an easy asset to understand. I am not talking only about cash in your wallet but also in your bank account. This could be in a checking or a savings account.

Your cash is directly available, so you should count it towards your FI net worth. Nevertheless, you should know that your cash will lose value over time due to inflation. The money will not decrease, but what you can buy with it will decrease. This is important because if you want to reach FI with only cash, you must save a large amount of money.

As a side note, inflation is not only related to cash! Your FI number will increase with inflation. That is why you should not have all your net worth in cash.

Even though cash is not the best asset you may possess, it is part of your net worth and FI net worth. It will easily be usable once you retire. And there is almost no downside in using your cash to cover your expenses. The only downside will be to lose on some very low interest rates.

Investment accounts

The following kind of asset is your invested money.

I talk here about available investment accounts. We are not yet talking about money invested in retirement accounts. This should be mainly your broker account. But some people also have online investment accounts such as peer-to-peer lending or real estate crowd investing.

These accounts are generally very liquid, and you can include them in your FI net worth. If you invest smartly, your money will increase over time. It will also generate dividends over time. You can reinvest these or use them to cover your expenses. Their value can directly be used to sustain your expenses.

However, depending on when you have to sell your investments, you may lose some money. On the other hand, using dividends to cover your retirement expenses is fine in retirement. To avoid selling at the wrong time, you can increase your cash allocation before retirement. But some people do just fine without any cash at all.

Another great thing about these kinds of assets is that they have no limit. You can invest as much as you can (and want). They are your greatest asset to reaching Financial Independence. This is especially true if you want to retire early. In that case, they are almost mandatory.

Retirement accounts

If you are serious about retirement, you should probably have some money in retirement accounts. This money is quite similar to your investment accounts.

In Switzerland, retirement accounts are the second and third pillars.

These accounts should definitively be included in your FI net worth. They are essential for your retirement and financial independence. Since they generally have tax advantages, you should maximize your usage of these accounts.

There is one big problem generally with these retirement accounts. They are limited in how much you can contribute to it. There may be some countries where this is not limited. But most countries limit this since they offer tax advantages on them. That is why you need to complement them with regular investment accounts.

Moreover, you must correctly account that these retirement accounts are unavailable today! They will be only available at the official retirement age, sometimes a few years earlier. They are not doing anything for early retirement. That means your other assets must cover the time between your early retirement and the time you reach the official retirement age.

To be more precise, you could even calculate several FI net worth. You could have your current and future FI net worth, including the assets available at retirement. I am not doing that now. But this could you help visualize what your net worth is made of.

Real Estate

Your real estate assets are part of your net worth. But they may not help you reach FI. And there may be several kinds of real estate assets in your net worth.

The most probable asset in your real estate portfolio is your home. There is something really important about your home! You need it. However, I do not think your house should be part of your FI net worth. If you sell it, you must buy a new one or rent another one.

In the first case, you will not change your ability to retire. And in the second case, you may increase your expenses. In any case, you cannot simply take the value of your house into account to become financially independent!

If you have other real estate assets in which you do not live, they should generate income. In retirement, you can use that income to cover some of your expenses, so you need a smaller net worth to retire.

In that case, you should again not consider their value for your FI net worth. If you sell them, you will have more expenses since your income will not cover them.  Even if you own a two million home and live inside, this will not make you financially independent. You may be independent once you sell it, though!

Even if your real estate assets are part of your net worth, they should not be part of your FI net worth. If you sell them, the money will be part of the net worth, but it will change your FI number. Selling your own house will likely increase your expenses. Selling a rented asset will also likely decrease your income and, thus, the expenses you must cover with your FI net worth.

Since we are not taking the real estate value into account, we should not take into account real estate mortgages as well. The expenses will be taken into account in your FI Number. But the mortgage value itself is not taken into account in the FI Net Worth.

I am not saying that real estate assets will not help you achieve financial independence! Owning your home may highly reduce your yearly expenses. And owning a rental apartment can generate a lot of income and thus reduce your FI number. But once you have integrated these facts into your FI number, you should not count them in your FI net worth.

Other assets

Some people take other assets into account when they calculate their net worth.

The best example of another asset is the car. I think nobody should include their cars in either net worth. They deprecate too fast. And if you have a car, that means you need it. If you need it, you cannot sell it. And if you sell it, you will also likely buy another one.

These assets will not increase your net worth. It will likely diminish your net worth. There are exceptions, of course. If you own collectible cars, they could have great value and easily be sold back. But you should be very careful about the evaluation of the value.

Some people also account for their assets in their homes. For instance, jewelry or computer. But jewelry is not a very good example. It is tough to resell jewelry at more than the value of the materials (mainly gold). The instant you buy them, they almost directly lose value. Computers and electronics have the same issue.

I probably bought over 10’000 USD of computers and electronics in my apartment. But I do not think I could get more than 2000 USD worth if I were to sell everything. I believe this should only be included in your net worth once sold. If you own something like a Picasso painting, you can probably add it to your net worth. But I am guessing that you are not reading this blog.

There is another problem with assets like your car or a collection of valuables that you own. They may take a long time to sell. It means you will not have the cash available when you need it.

None of these assets should be included in either your net worth or your FI net worth. They are not liquid enough and are losing value too quickly!

FAQ

Conclusion

As you can see, there is more than meets the eye for the assets in your net worth.

Not all assets are equal. Some assets will help you much more towards Financial Independence than others. For instance, it is unlikely that your car will help you in retirement. Therefore, it is essential to define your FI net worth differently from your net worth.

There are also some significant differences in some of your assets. The house you live in may help you reduce your expenses. But its value will not help you retire earlier unless you sell it! And if you sell it, you can reassess your FI number. Even the real estate that you are renting has the same effect. You will have less income if you sell it, and your FI number will increase. Therefore, these assets should not be included in your FI net worth.

The FI net worth is an essential concept that few people take seriously. Almost everybody agrees on what should be on net worth. But there may be several kinds of net worths.

To learn more about net worth, learn how to compute your net worth.

What do you think about the FI net worth? Are there several kinds of net worth?

Recommended reading

• More articles about Financial Independence and Retire Early
• More articles about Retirement
• Out of The Rat Race – Financial Freedom – Book Review
• 7 Best Blogs on FIRE
• Your FI Number – How much do you need to retire?