Lately I have developed a renewed appreciation for the fact that net worth is not a proper measure of how wealthy one is, nor is income a measure of how rich one is. What these numbers measure is simply one’s level of interaction with the economy.
Our culture has done a good job at convincing us that the only way to get what we want (stuff, services, health, comfort, …) is to interact with the economy. If this is really true, then yes, net worth and income is really important.
However, this is NOT true.
Just consider the value of the work done by stay at home moms. This work is not registered in the economy and it does not contribute to GDP or gross domestic product, yet it provides an economic benefit.
Clearly homemaking and other skills must therefore be worth something. The reason is that they can substitute for income since you don’t need to buy services from someone else to get what you want. In that sense skills substitute for income as well as savings. The reason skills substitute for savings is that you don’t need savings to pay for services later on, if you can perform the service yourself.
In my opinion building up your intangible net worth is as important as building up you tangible net worth e.g. your savings because they can substitute for each other to some extent.
For instance, if you know how to cook a meal better than the restaurant equivalent for 10% of the price, would you really want to eat at restaurants? What if you knew how to set up or fix your own computer, car, plumbing, … ? That way you would not need to hire someone to do it for you. If you knew how to set up a training program, you would not need to buy one from a gym. If you were in good physical shape you would not think twice about walking 1200 yards rather than taking the bus (yes some people would rather take the bus than walk for 10 minutes).
From a personal finance perspective, how much is the skill of being able to stretch the money 10% further worth? Very easy. It’s worth 10% of your retirement goal. If your goal is $1,000,000 being able to save 10% through to creative and clever thinking and personal skills could easily be worth $100,000 which in turn could mean that you could retire one year earlier than planned.
I’ll let you in on a little secret of extreme early retirees. Ten percent in nothing. Really nothing! We tend to be regular MacGyvers when it comes to finding solutions without paying someone else to deliver it. This does not mean we are cheap or provide inferior solutions compared to what a gadget made in China could provide. It simply means that we don’t own a ton of specialized $59.95 gadgets that each does one single thing.
Consider this equation
gym subscription + central heating (the default solution)
=
gym subscription + wood stove + precut wood (the expensive consumer solution)
=
gym subscription + wood stove + wood + electric saw (the slightly smarter consumer solution)
=
wood stove + wood + manual saw (the smart solution)
It’s fairly trivial when you think about it, but just admit that your first impulse when you got that wood stove installed was to go out and buy firewood precut or buy an electrical saw to cut it all while trying to get in shape by pulling some lever in a gym which you probably had to drive your car to. Instead, buy a good crosscut saw (quality saws are $80 and up but last a LONG time). Oh, and before you reach for the credit card. Yes, it is easy to make your own sawbuck if you know how. No need to buy one.
So when you calculate your net worth, maybe you should add 25 times your ability to save money. For instance, if you figure out how to save $1000 a year on a regular expense, you can add $25000 to your “total net worth” which is comprised of “economic net worth” and “skill based net worth”.
