While discussing personal finances, the most sought after number is the Net Worth of an individual. Net Worth (NW) is simply the total assets of a person, minus all his liabilities.
Assets would comprise of your house, car, investments, jewelry, watches, yachts, and everything else which is tangible and you hold dear. Liabilities would be any loans or borrowings that you may have outstanding.
Deduct the liabilities from your assets and voila, you have calculated your NW. A positive NW is a good sign to begin with since your assets outweigh your liabilities, and that is what personal finance is all about, isn’t it?
However, using the NW does not factor in the efforts of the said individual in arriving at his current financial position, and the question about whether “He/ She is worthy?” remains, even if the NW is a big number.
Since we’re already using Thor, let’s dive into this reference itself, to understand Lifetime Wealth Ratio (LWR) as well.
For those who may be new to the Avengers theme (Um, why?), Thor is the God of Thunder who wields the mighty Mjolnir, (non-Avengers gang: his hammer). While, Thor has the blood of the Gods itself, his lineage is not the reason that he can control the hammer. You see, the hammer has its unique quality inscribed on itself, which says, you have to be “worthy” to even raise the hammer. So, Thor can flaunt Mjolnir, not because he has inherited the hammer, but because, he, himself is worthy.
A lot of times, the NW of a person is made up majorly by the amount received in inheritance. This isn’t on account of the personal finance skills of the person in discussion, since there was no fiscal responsibility exercised on his part, in earning the NW. This would be the case wherein, Thor can use Mjolnir JUST because he is the Son of Odin, and does not consider his own self worth.
The LWR tries to factor in the efficiency of financial management for a person in the process.
The LWR is calculated as follows:
The LWR has the advantage of comparing the current situation of a person (NW), with all the cash inflows he has had in his life (Total lifetime income). It is a brilliant measure of how efficient you are in terms of saving, investing and converting those two, into your NW.
While someone could be good at saving, he may have terrible investing intuition and can blow it all by buying a portfolio of credit risk funds and equities of “Reliance Communications and the Suzlons” of the world (Sorry, for the attack).
And while someone may be as great as Buffett in the investing process, he cannot do major wonders for his total NW, if he spends lavishly and has an extremely limited investment corpus.
The combined factors of savings and investing process in determining this ratio, is what makes it a better gauge than just using NW, for evaluating the financial sense of an individual.
However, since there is no way for the above formula to factor in age of a person, it may be slightly unfair for the younger class, who have just started working. But, the younger class who’s not working/ just started earning, would not have a large NW to begin with too, perhaps.
As per the original article published by J Money, who came up with this metric, this is the implication of your ratios, which may be, um, not scientifically derived? While he did spend an entire 15 seconds in coming up with those, it is highly advised that these not be used as pick up lines!
Since you’re all probably wondering (not) how to calculate this yourself, let me be of some help.
While calculating NW for an individual is an easy task, estimating lifetime earnings is probably a challenge. While the information to calculate lifetime earnings, is easy to gather from US Social Security records, it is not very easy for India. But your past tax returns can be a good place to begin with.
And in case, you have just started earning too, try to keep a track of this ratio on an ongoing basis.
So, get cooking, calculate that LWR, and see if you’re worthy of being judged financially shrewd!