This blog contains some simple tips and advice from two regular guys. We're not accountants, financial advisors, or brokers, so follow, ignore, or discuss our ideas as you see fit.

Wednesday, June 11, 2008

Article: Net Worth Drop in 2008

Posted By Paul

I read an article on CNN Money that was talking about how the net worth of households in the US fell by 3% in the first quarter of 2008.

The full article is here

but I wanted to call out some of the highlights of the article here is the first excerpt:

"The recent declines, however, may not affect consumer spending, said Michael Englund, senior economist with Action Economics. Americans have actually spent more in recent months, particularly at the gas pump as fuel prices soared."

I can certainly relate to spending more at the gas pump, but my wife and I certainly aren't spending more in general (I talk about it in my earlier post So the economy is bad, now what)

Here is another quote:
"The fact that consumers continue to borrow against their homes, even as they decline in value, shows how troubled Americans are."

This was one of the most alarming sentences to me, it really worries me that a lot of American families are having trouble paying the bills. For years I've been hearing about the phenomenon of using your house as an ATM (doing cash-out refinancing or home equity lines of credit), I think that practice was always dangerous, but in today's market it has become a quick route to financial destruction.

The article sites drops in home values and stock values as a big cause for the drop in net worth. I can relate to both of those, and since I track my net worth faithfully I decided to check and see how this family's net worth has done since the beginning of the year.

The answer? Our net worth has actually remained flat since the start of the year. Our house value (which I estimate using zillow) has definitely fallen, and our stock market investments have also fallen, but on the plus side our safer investments (CD Ladders, our savings account, and savings bonds) have helped to offset that. Plus I've been working to beef up our rainy day fund, so that extra savings has helped to offset the drop in the stock market. Not to say that we haven't taken a beating on our investments in the last few months, but thanks to the fact that we're diversified, we haven't fallen as far as many homes in the U.S.

Perhaps in addition the basic rules of frugality, the message here is that it helps to diversify. By not having ALL of our money tied up in stocks or real estate we're weathering the fall in these markets pretty well. Our safer investments are becoming a nice consolation prize as the more volatile markets fall. Of course the stock market and housing markets will almost certainly recover, but in the meantime it's nice to have SOME investments going up, even if the return isn't spectacular.

Best of all, the money that IS in the volatile markets is money we don't plan on needing anytime soon. We are comfortable in our house, and almost all of our money in the stock market is in retirement account mutual funds, so we won't be touching that money for decades.

The money we might actually need sooner (and by that I mean our rainy day fund) is in safe investments that are immune to the crazy ups and downs of the market.

So now we just have to sit tight and wait for things to improve!

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