Should emergency funds be included in net worth?

If you keep track of your net worth, well done! It’s important to do, how else can you know whether you’re amassing a nest egg for later in life or in a worse financial position than the day you were born?

But when you’re doing this calculation, what should you include? I’ve written before about three ways to calculate net worth. Today, I’ll hone in on emergency funds and whether they should be included in net worth.

To answer the question, we need to understand why knowing your net worth is important. Because I crave simplicity, I would argue there’s only really one solid gold reason to know your net worth, being: Is it what you want it to be yet?

Knowing what your net worth is doesn’t have much immediate use, because most of your net worth can’t be immediately liquidated if something came up. Thus the need for emergency funds. So knowing your net worth is all about the future. If you have all the money you think you’ll ever need, you can stop stockpiling it, right?

Now, if knowing your net worth is about the future, then it invariably involves making assumptions, as does everything involving the future. Namely, you have to extrapolate from your current net worth and assume that because your net worth is X now, you’re on track to have a net worth of Y in 10, 20 or 30 years.

This is where the question around including emergency funds comes in. Because the safest assumption to make about emergency funds is that they won’t be there. Let’s say you’ve calculated that in order to have a comfortable retirement you need a million dollars, and that’ll give you sufficient returns to fund your lifestyle indefinitely. That’s a completely arbitrary figure, you may need more or less.

But, if you’re counting on that million dollars to provide you returns, then I would argue the only safe assumption you can make about your emergency fund is that the day before you retire, you’ll have an unexpected medical bill or your car will need fixing or a family member will need to post bail, or something else will come up. Then that money isn’t going to be there.

The purpose of an emergency fund isn’t to provide a return. Its purpose is to protect the money that is supposed to provide a return. For that reason, I believe it’s best not to include your emergency fund in your net worth.

What do you think? I’d love to hear a dissenting view from someone who has a different perspective 🙂

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