Let’s talk about net worth, value and the structure of your wealth because each of these can help you build wealth faster.
Remember I was telling you last October that even when we had a glimpse of the so much longed-for debt finish line we still spent about £5,000 (about $7,500) on doing up the last shabby bathroom in the house. It all turned out really lovely; if you don’t believe me have a look at the pictures!
But was it a financially justified and savvy decision?
Was this the thing to do when the debt could have been paid off a couple of months earlier and, let’s face it, we don’t really desperately need this space?
And the time this took and the disruption it caused! John scoured the internet for new bathroom stuff instead of working on his projects. We spent hours matching colours and looking for bed linen. And I can proudly say that for the first time in my life, the difference between Venetian and Roman blinds is clear to me – simple, you put the former in your bathroom and the latter in your bedroom!
It seems like the wrong thing to do at the time, right? Wrong! And this is why: it was all a matter of net worth. But not a matter of the value of our net worth but of its structure. Let me explain!
Most of the time when people talk about their net worth they mean value.
Now, this actually can be a fairly good measure of how wealthy one is; so in the early days of my financial awareness, I did calculate our worth. Heck, I was so keen on this one that I developed a tool to calculate net worth (this tool assumes that your net worth is what will be left behind were you to die today so the value of insurance policies is included).
What did I see? What I saw made me look in the mirror and tell myself the following:
‘Your calculations show that you are relatively well off. How did you find yourself in all this debt then? Are you really that silly or there is something else wrong with you?’
Now, it is never a good sign when I start talking to myself in the mirror – this is usually an early warning of a budding obsession.
In this case, I could not get the matter of our net worth out of my head; I went back to the spreadsheets and looked again. That was my answer!
There was nothing wrong with me; what was/is wrong is the structure of our net worth. Where net worth is concerned structure trumps value at any time! What was (and still is) wrong is that our family net worth shares the two key features of wealth in the UK: it is locked either in non-income generating real estate or in pensions. This means that all our wealth is ‘dead’ money so it is costing us rather than making money for us!
There has been enough written about how keeping ‘dead’ money impedes wealth building so I am not going to go there. For me, the question was ‘How to change the structure of our net worth so it can start working for us?‘
There are two framework actions that we ought to take, both related to property (it is best to leave the pension funds alone):
- Re-structure property in Bulgaria (largely inherited) so that it generates income; and
- Look at our housing arrangements and see whether some income could be generated there.
Looks simple, you may think, but let me assure you it is far from it. To begin with the property market in Bulgaria, and more specifically in the place where the apartment and house are, leaves much to be desired. Renting these properties out is not realistic – rents are low, tenants are irresponsible and there is no land-lord insurance (apart from paying shady organisations of strong boys with dubious morals for protection and the occasional punitive action).
This is why we are off to Sofia this Easter – we will probably need to drop the price substantially but we want it done and completion achieved.
The next problem is what to invest the money in. Buying a property in the mountains? Well, many apartments in the skiing area are empty.
Buying an apartment in Sofia and renting it out? Rents are getting rather low and the ROI is pitiful. This needs so much more research, thinking and sheer luck. Meanwhile, the money will have to stay in the bank but at least banks in Bulgaria pay 6-7% interest.
Now, let’s refocus on our house. It is not only that most of our wealth (apart from pensions) is in this house; as I have said before when you live in a house that has more bathrooms than people living in it, you know that you have too much house. It is a bit like knowing that your heart rate monitor is for changing when you are running and it shows a heart rate of zero.
There are two ways to restructure our wealth and deal with the issue of having too much house and both involve making it pay for itself:
- First, we could release some capital to invest in an apartment to rent by selling this house and buying a smaller, cheaper and not necessarily worse one. This will accelerate our ambitious programme for making £2.5 million in five years so that I wouldn’t have to be employed if I don’t want to. On the negative, this is our home (and, yes, I know this is an emotional argument).
- Second, we could keep the house but rent out part of it (a room and a bathroom). Here is where all this decorating and building work I mentioned at the beginning comes into the picture; this is the ‘method in the madness’ and why it was worth spending on renovations instead of hurrying even further the debt repayment.
We are working towards restructuring in Bulgaria and keeping our home but renting out the space to part-time visitors. What is the takeaway?
Final words about net worth:
Knowing how much is your net worth is helpful but could be misleading. Another important aspect of wealth to consider is its structure. Were there to be something wrong with the structure of your wealth be warned: correcting it is like sailing a boat – it takes time and demands considerable foresight and planning.
Net worth is something that one the surface, from an accounting standpoint, is straightforward. Assets minus liabilities.
However, I think that in practical terms, it can be more complex than this. Much depends on cash flows and contingencies. Hmmm….I now have an idea for a post 🙂
@Digital Personal Finance: It is one of these, I agree, and glad I gave you an idea for a post :). I do find that many things in both PF and life are deceprively simple – asking ‘what’ is simple; getting to ‘why’ and ‘how’ can be very complex.
Investing in kitchens and bathrooms generally yield 95% of the money invested. In one way, investing in your home actually may have increased your net worth. I am not sure if it is dollar for dollar.
@Krant: True! Doing up the bathrooms did increase the value of the house; it also, and more importantly, makes it much nicer to live in. In fact, I can’t believe the difference it makes to quality of life to have nice bathrooms. Still, our net worth has grown but there is no liquidity and flexibility in it.
Larry is right, you may have improved the value of your home by doing the reno. And should get the money back in rent in just over a year, making it a better return than the one you are paying on debt. Re Bulgaria I don’t know if 6% makes up for a weak pound, it may be worth bringing some money to the UK to save on exchange rates.
@Pauline: We were planning to leave the Bulgarian part of the operation in Bulgaria – a lot will be lost through the transfer as well. As to the weak pound (and at the moment I am not complaining but still hope this will change soon) the euro is bound to follow (and the Bulgarian currency is tied up to the euro).
‘Net Worth’, in my view, needs to have a weighting on the emotional value placed on the item/amount you are considering. Your property in Bulgaria does not appear to have much of an emotional value (unless I am misreading you) and is costing you in taxes so liquidating it makes sense for whatever you can get.
When it comes to your home property that is a different matter. When we downsized, we had no children at home, all were married or partnered and unlikely to return home. We had 4 bedrooms we only went in to clean – and we were both working full time. We were also agreed that we wanted the reduction in outgoings to free up money for more travel – not round the world, but long weekends away and regular trips to the USA where 2 of the children are based.
We don’t regret that BUT we found a cottage across the park from out old house and the move was easy. We did discuss letting part of the house out but decided we wouldn’t like having strangers living with us.
It’s not the answer for everyone but that sort of ‘value’ is important – which is what a lot of debt busting websites seem to miss.
This life is not a rehearsal. It is the ultimate reality show.
Pat: You are right: the property in Bulgaria (inherited) would have to go. Our house, for the time being, stays and we shall see how things go. As John pointed out it has made loads of money already anyway.
Interesting thoughts, and great post. Thanks for elaborating on all the variables involved in trying to quantify such a complex indicator.
Like Larry said, I think you might actually be improving your long term net worth assuming that you sell the house. I know it’s not a perfect correlation, but can have a good impact. We’re actually getting ready to redo our master bath here in the next month or two. It’s mainly out of necessity as the shower is falling apart, but it has caused us to look at what we want vs. what we need and if what we’re spending will be worth it in the long run.
@John S: Having a nice bathroom is so important – it is priceless. And it is worth doing them as you really want them since the saving for going simple for something you need is not that great. What saves a lot we found is to go to show room to see what is on offer and then order it on the internet. My guess is that John saved us about $3,500 doing this (takes a bit of time but the pay off…).