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May 24, 2017

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Thanks a very successful article.

good one kredi!

I get the point of 'separating real vs false net worth' but this approach changes the meanings of accounting definitions.

For ER what you need is productive assets, so anything that earns a financial return is in the 'real' category. Stuff that just sits hoping for appreciation or worse carries maintenance costs is in the 'false' category. As for primary home, what matters for this calculation is not its 'market value minus mortgage', but rather what you save in rent (less property taxes, insurance, etc).

Similarly not all debts matter the same-- those that carry near-zero interest are much less of a drain than expensive debts such as credit cards, or even worse, payday loans.

Splitting net worth into two categories and lumping together all debts doesn't clarify the situation because what you really want for ER readiness is a completely different metric-- namely net accessible passive income.

For example say you're sitting on a stash of gold bars in your basement. Their accessible passive income is nada, but if you trade them for REITs yielding 10%, now it's working for you. But if you trade them for a time-share, that's another story! IOW the market value of this asset doesn't matter, it's the income/outgo consequences that you want to measure.

There seems to be a strong desire by people giving financial advice to keep redefining what Net Worth is. Here was have "Real", "Fake", and "Usable" Net Worth all being used. This is unfortunately just salesmanship. Fake Net Worth is a fake concept. There is no such thing and it is unfortunate that financial "gurus" keep doing this with net worth when they could just make their argument using the actual point.

The point here seems to be about early retirement and as such the key is cash flow. And the thing is cash flow is a perfectly understandable concept and succinctly describes exactly what needs to happen. Fake net worth is a convoluted concept that needs to be coaxed out of a long winded explanation of financial gibberish. Your net worth is made up of assets. Anything that can be sold for a value is an asset. Its not fake and its not a liability, its an asset. Period! But with respect to cash flow assets have different levels of productivity. Some assets generate cash, some are idle, and some require cash to maintain them. This doesn't change your net worth or whether they are assets but it does drastically affect how much cash flow your net worth can generate. The key is to have as many of your assets generating cash as possible. If you have assets that are idle (Gold for example), or assets that cost you money to maintain (A Ferrari), then those assets are not helping and may be hurting your ability to retire early. Shift as many of the assets in your net worth to income producing assets and you will retire earlier because your cash flow is higher. It's that simply. Cash flowing assets are key, not real versus fake net worth.

These guys really do know better than this. I know they do. It seems they think that redefining net worth sounds like some kind of discovery or something. Like we have been led astray all along and we don't know what net worth actually is and they are going to educate us. Yes we do know what net worth is. It's just that net worth isn't enough and that is where we may have been led astray. Net worth needs to be combined with cash flow, which comes out of the kinds of assets in your net worth.


The point is you have a net worth but not all your assets are working for you. Some are productive, some are idle, and some are costing you money to maintain. You want to convert as much of your net worth assets to productive assets as possible so as to maximize the cash flow that your net worth can generate. This is something that makes sense but it doesn't sound as fancy as fake net worth even though that is a nonsense concept.

It's also unfortunate that he puts retirement assets in the fake category as well. Those are productive assets even if access to them is more hindered by time constraints. But they are not truly inaccessible. If you are getting big matches to contribute to your 401-k then you can easily afford to pay the 10% penalty and come out way ahead if you absolutely must access that cash early. Of course there are 72T rule ways to access the money and there is also the ability to draw down non-retirement funds first and then use the retirement funds after age 59.5. There are many ways to skin that cat and the advice to simply forgo retirement plans is very bad advice for most all people.

Disappointed by the simplified thinking and fancy talk about special kinds of net worth to get across the basic point that if you want to retire early the assets in your net worth need to produce significant cash flow.

Hii, This article provides valuable information. Thanks for sharing.

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