Imagine if Gustave Eiffel instead of using meters to draw the Tower Eiffel, used centimeters. If you aren’t a pro in mathematic, a centimeter is 1/100 of a meter.
The result? A mini tower.
Not so impressive, right?
However, what has to do an engineering mistake with your net worth?
By changing the base unit of your net worth, you are going to get a totally different result from your financial life.
What if you plan to retire in your 30s, but instead you work till your 60s.
How do you feel about this small miscalculation? I never thought a so small detail like the main currency to calculate my net worth, would have profound consequences. I left on the table US$90.000 over three years.
Let me ask you a personal question?
Are you using your home country currency to calculate your NET WORTH? If so, you’ve got the impression of getting wealthier year after year. In reality, you aren’t going anywhere and I’m going to prove it in this article.
Today I’m sharing a better way to calculate your net worth so you can make smarter financial decisions while reaching retirement earlier.
THE WORLD CURRENCY IS A MITH
Five years ago, I had to choose a base currency to compare my NET WORTH changes over time. It’s important to know if you’re improving or declining.
I had bank accounts and investments denominated in different currencies. You know, some money here, some money there.
The designed currency would be kept over the years regardless of my residence. Back then I was an International Chef, so it was common to relocate in a new country and get paid in the local currency. Aka, open another bank account with a new currency.
The most important thing about money is this: We need to be able to count on its value, and that value needs to be stable over time.
I thought; “Which is the most stable currency in the world?”
SIMPLE, the US dollars. It’s the world currency everyone uses, right?
From back then until today I’ve calculated my net worth in US dollar on the FALSE impression that the US dollar is a stable currency. Far from it.
The FACT is any “Fiat Currency” is unstable; US$, Euro, Yen, Pound Sterling, etc.
So, calculating your net worth with an unstable Fiat Currency is like building a house without foundations.
So, what is FIAT money?
Fiat money is currency that a government has declared to be legal tender, but it is not backed by a physical commodity. The value of fiat money is derived from the relationship between supply and demand rather than the value of the material that the money is made of.
Still confused? I am.
TheMoneyEnigma illustration is pretty interesting.
Great! Now I’m more confused than before. What about you?
Instead of trying to understand what fiat money/currency is, it’s way better to figure out if fiat currency holds up in value over the years.
But first, I’ve got a story for you.
THE STORY OF TOM AND HIS GRANDFATHER
Tom and his grandfather go for lunch together.
Walk in the door, and the grandfather is shocked after looking at the menu.
Grandfather: Tom, the first time and last I visited McDonalds was 60 years ago with your grandmother. It was something new back then. It was also cheap.
Tom: Grandpa, but McDonald is cheap.
Grandfather: You kidding! US$1 dollar for a cheeseburger? The last time I paid 15 cents for one of those.
“Did you enjoy the story, Pal? I try my best…”
McDonald is cheap today as it was 60 years ago. It’s the value of the US Dollar eroding.
Calculating your net worth with an eroding currency (all Fiat Currency are) is pointless.
So, what to do instead?
Get the NEW Net Worth Calculator you can use to track your financial well-being, the same I’m using to compare my progress. Click the button below to get it instantly.
NET WORTH ACCOUNTING; WHY GOLD IS THE ULTIMATE CURRENCY
What currencies are or aren’t doesn’t matter when calculating the REAL VALUE of your net worth. What is important is using a base unit which doesn’t lose value over the years.
Gold is the perfect unit.
The reason is simple, gold is STABLE. Gold is limited by its nature. On the other hands, currencies are unlimited because government operates the presses.
NOTE: Don’t confuse calculating your NET WORTH in gold standards VS investing in gold. It’s two totally different things.
When I first saw this chart, I thought gold had a good run in the last 15 years as part of a cycle, which is for a part true.
However, when I went to dig deeper, I noticed that gold is the only “currency” that doesn’t fluctuate. Fiat currencies are the one fluctuate around gold.
Well, what about when Galileo Galilei discovered the earth rotate around the sun, not the opposite has was the belief back in the 15th century.
I’ve got a small exercise that will show you with your own eyes this shocking reality:
- Visit FxTop.com.
- Add gold as 1st currency and your home currency as the second currency. In my case, US Dollar is my second currency because it was my primary currency for my personal accounting.
What do you think? Share your results in the comment below.
Try any currency and the result is always the same; fiat currencies are losing value, FAST!
The fact is today you are getting less gold for your bucks than 10, 20 or 30 years ago.
So, what is the point to calculate your net worth with a losing currency?
Excited big boy: Mamma, I’m rich! I’ve double my money in 20 years!
Mum: Great! So you can buy a car instead of using mine.
Excited big boy: Mmmh :(, actually I can’t afford one as I couldn’t 20 years ago.
USING YOUR HOME CURRENCY TO CALCULATE YOUR NET WORTH IS DECEIVING
You aren’t taking into consideration the inflation. US$10,000 today aren’t worth the same than US$10.000 one decade ago.
That’s why grandpa in the story earlier is shocked at the price of a cheeseburger. The Us dollar has lost value.
Gold can’t lose being a commodity. 10 Oz of gold 10 years ago are 10 Oz of gold today.
I recalculate my net worth adjust for gold from 2009 till today. My NET WORTH perception is entirely changed moving from US dollars to a GOLD standard.
I made significant gains in US dollar terms, but in GOLD standard the return is just average.
This is motivational for me because now I know that I need to do much better if I want to reach my next goal of 800 Oz of gold. There is a little TOOL that I use to convert my NET WORTH in US$ to GOLD.
If you want accurately calculate your net worth over the years, GOLD is the way to go. Don’t you like gold? Use SILVER instead.
Get your hands on my NET WORTH CALCULATOR with the gold conversion formula that will help you keep track of your Money in real terms as explained in this post, then just click the button below to grab it (for free)!
If you can’t measure it, you can’t improve it
Avoid any FIAT MONEY like the plague if you’re serious to achieve financial prosperity.