3 Times when it's OK that your net worth is decreasing.
You probably read that title and thought to yourself 'man this guy really has no idea what he is talking about.' And you'd be right. But also, and more importantly, you would be wrong. And that is what is important here. Not just the fact that people can be wrong, but that first impressions are generally poorly thought out and rash.
Generally speaking, yes - net worth decrease is bad and should be avoided. But also, net worth decrease is inevitable during certain circumstances, and most of them are easily classified as investments or splurges.
Time #1: During a remodel
The goal of a remodel is either to splurge on yourself or invest in a property that you own. It can be as simple as paying a contractor to do a bathroom or kitchen remodel where you pick the color of the floor and some appliances. It can also be as complicated as assisting your brother on the weekends and weeknights for 3 weeks completely gutting and refurbishing a property to take advantage of an increase in livability and equity of said property.
Because of this level of monetary investment your net worth should decrease during the remodel time frame. Is this a bad thing? Nope, you have to realize that when you are done you will have ultimately increased the allure of the home and most likely the value. And if you are a landlord, that is a very good thing in a competitive market. You may not see this return on investment (ROI) for years to come, but if you planned it right your remodel should turn into a long term investment with very tangible short term benefits.
Time #2: Buying a property
Let's say you are purchasing a property at market value with 20% down payment. Unless you get a free appraisal, loan, inspection(s), and realtor, you will be paying to do business. When you are done it is likely that your down payment that went to principal and the balance of the loan will equal market value, so technically your net worth should decrease for a while.
I have written a pretty succinct article on how to make a killing with a rental property on paper. In that piece I point out the long term benefits of said property and equate them to a yearly ROI. I don't really talk about the fact that your net worth will decrease in the short term. And the property may even take up to a year or two to return all the money you have invested especially if it needs some repairs or normal maintenance (paint, anybody?)
The key with buying a rental property is trying to do the following while shopping/closing:
- Get a lower price than market value accepted
- Itemize repairs before closing and get seller concessions for them (no house is perfect trust me)
- Try to get the sellers to pay closing costs for you
- Don't miss any major issues! Especially with bank owned houses or places sold "as-is"!
These strategies will help your net worth recover faster from a home purchase, and may even let you come out on top after a few months only. Initially though you will suffer on paper - I guarantee it.
Time #3: When you splurge on yourself
So here's the deal. Many people actually use money to go on vacations, buy cars, eat out, and to do other pleasurable things. The difference between them and us is that FJJ practicing individuals are capable of spending less on this area in the short term. I am saying that I spent 2500$ on a corvette and easily 500$ on deferred maintenance and fixes. In straight English: I splurged on something I totally didn't need but I wanted and it makes me happy. Is decreased my net worth by 3k so far. Unless I offset this number with the cars equity, but who am I kidding: it is a gas guzzling maintenance heavy '85 corvette with the 'undesirable' manual trans after all.
Our peers are going to go out and lease new 370z's, buy new BMW's, and do other totally not thrifty things to splurge and feel good. But in reality, would a new 370z make me happy? Yes undoubtedly it would make me very happy. But what if somebody door dings that car in a parking lot? What if I hit a deer with it? What if I drive into the ghetto and have to park it right there and leave it? During those times I have been happy to be driving a beater Honda or a sweet ride that I didn't break the bank to buy. Maybe all I am saying is that we all splurge, but you should try to not have it effect your future retirement or investment plans if you can avoid it. And really you need to think about the usage model of what you are splurging on and how you will actually enjoy it, and decide if there is a cheaper way to get the same thrill.
You want your net worth to go up. Period. And if it is going to take a tumble you really need to think about why this is happening, could it have been avoided, and is this an investment scenario which you are banking on creating a return sooner or later.
Now as I sign off and publish this, I am considering splurging on a new pair of black slacks and trying to justify the ROI. I am doing this because I just stapled the ones I am wearing back together in the bathroom at work. This is possibly one manifestation of being thrifty but I still can't see how it could have been avoided. Because how would you know that your pants are going to tear before it happens?