Net worth: the only scoreboard that matters

Most people track the wrong number. They know their salary to the franc, they have a rough feel for what is in the current account at the end of the month, and they have almost no idea what they are actually worth. Salary is a flow. The balance in the current account is an accident of timing. Neither tells you whether the last three years of work left you better off.

Net worth is the number that does. It is a single scalar: everything you own, valued honestly, minus everything you owe. It is boring, it moves slowly, and it is almost impossible to fool. That combination is exactly what makes it the right scoreboard.

What net worth actually measures

A balance sheet is a snapshot at an instant. An income statement is a film of a period. Net worth is the balance sheet. It answers one question: if you liquidated everything today at fair value and settled every obligation, what would be left?

The reason this matters more than income is arithmetic. Two people earning CHF 140,000 can have net worths that differ by half a million francs, because net worth accumulates the difference between what came in and what went out, compounded by whatever the retained amount earned. Income only sets the ceiling. Net worth records what you did under it.

The other reason is that net worth is the quantity every real financial goal is denominated in. Buying a flat requires equity, not salary. Stopping work requires a stock of capital that can fund a stream of spending. Surviving a redundancy requires assets you can reach. All of these are balance-sheet questions.

Building the statement

Start with a single date and use it consistently. The last day of the quarter works well: four data points a year is enough to see the trend and few enough that you will not obsess over noise.

List assets in order of how quickly you could turn them into spendable francs.

• Current and savings accounts, at balance.
• Investment accounts, at market value on the measurement date.
• Pillar 3a balances, at the value shown on the year-end statement.
• Pillar 2 (occupational pension), at the Freizügigkeitsleistung — the vested benefit shown on your annual pension certificate. This is the amount that would transfer with you if you changed employer, and it is the correct figure for a personal balance sheet.
• Property, at a defensible estimate of market value.
• Durable goods worth more than a few thousand francs, at what someone would actually pay.

Then liabilities, at the amount owed today, not the original amount borrowed: mortgage principal outstanding, personal loans, leasing obligations, card balances carried past the statement date, and any tax bill that has been assessed but not yet paid.

Take a worked case. Assets: CHF 25,000 in cash, CHF 80,000 in a brokerage account, CHF 45,000 in pillar 3a, CHF 160,000 of vested pillar 2 benefits, and a car worth CHF 12,000. That totals CHF 322,000. Liabilities: CHF 3,000 on a card and a CHF 15,000 personal loan, so CHF 18,000. Net worth is CHF 304,000.

Three rules keep the statement honest. Value assets at what a buyer would pay, not what you paid or what you hope. Never carry future salary as an asset; your earning power is real economic value, but it is not on the balance sheet and treating it as though it were is how people justify borrowing they cannot service. And count pension assets, even though you cannot spend them today, because leaving them out makes your progress look far worse than it is and encourages the wrong decisions.

The Swiss balance sheet is two balance sheets

If you file a Swiss tax return, you already produce something that looks like a net worth statement every year. It is not the same statement, and knowing where the two diverge is genuinely useful.

Switzerland levies a cantonal and communal wealth tax on net assets, with a tax-free allowance and rates that vary enormously between cantons and even between communes within a canton. The taxable-wealth figure is computed under specific rules, and those rules exclude some of the largest items on an economic balance sheet.

Occupational pension assets and pillar 3a balances are not part of taxable wealth while they remain in the pension system. They become taxable wealth only once paid out. Ordinary household goods are outside the wealth-tax base. Vehicles are treated differently from canton to canton. Real estate is carried at an official tax value set by the canton, which is generally set below market value rather than at it, and the method differs by canton. Debts, meanwhile, are fully deductible from taxable wealth, which is why a mortgage reduces a wealth-tax bill.

Run the earlier example through that filter. Strip out pillar 2 and pillar 3a, leave cash, the brokerage account and the car, and deduct the CHF 18,000 of debt: CHF 25,000 plus CHF 80,000 plus CHF 12,000 is CHF 117,000, less CHF 18,000 gives CHF 99,000 of taxable wealth. Economic net worth is CHF 304,000. The gap of CHF 205,000 is precisely the pension assets, CHF 45,000 plus CHF 160,000.

Neither number is wrong. The tax figure determines what you owe. The economic figure determines whether you are getting anywhere. Keep both, and never mistake one for the other. A useful side effect of the wealth tax is that Switzerland forces you to inventory your assets annually whether you like it or not, which makes the personal statement cheap to maintain: the securities and accounts schedule you file already lists most of it.

Decomposing the change

A single net worth figure is a fact. The change between two figures is information, but only once you split it into its causes. Three things move the number: money you added out of income, returns on what you already held, and revaluation of assets you were not going to sell anyway.

Continue the example over a year. Contributions of CHF 30,000 go in from salary across cash, the brokerage account and pillar 3a. The CHF 80,000 portfolio returns 6 percent, adding CHF 4,800. The CHF 205,000 of pension assets are credited at 3 percent, adding CHF 6,150. The car depreciates by CHF 2,500. Total return across all invested assets is CHF 10,950.

End-of-year net worth is CHF 304,000 plus CHF 30,000 plus CHF 10,950 minus CHF 2,500, which is CHF 342,450. The change is CHF 38,450. Of that, CHF 30,000 came from saving, which is 78 percent, and CHF 8,450 came from returns net of depreciation, which is 22 percent.

Note what repaying the personal loan would have done: nothing at all to net worth. Moving CHF 5,000 from cash to principal reduces an asset and a liability by the same amount. Debt repayment shows up on the scoreboard through the interest you stop paying, which is a spending item, not through the transaction itself. The lesson on debt priority takes that further.

The 78/22 split is the important part. Early on, your savings rate dominates and your returns are a rounding error. The crossover happens when expected return on the whole portfolio exceeds annual contributions. If you save CHF 30,000 a year and expect 5 percent, the crossover is at CHF 600,000 of invested assets, because CHF 30,000 divided by 0.05 is CHF 600,000. Below that level, arguing about fund selection is a smaller lever than adding another CHF 5,000 of savings. Above it, the portfolio starts doing the heavier work.

Normalising the number

An absolute figure means little without a denominator. Two are worth tracking.

The first is net worth divided by annual spending. If you spend CHF 55,000 a year and hold CHF 342,450, you are carrying about 6.2 years of spending, since 342,450 divided by 55,000 is 6.23. This is the unit that connects the balance sheet to every goal that involves not working, and it has the useful property that cutting spending improves it from both ends: the numerator grows faster and the denominator shrinks.

The second is liquid net worth: the subset you could convert to cash within a week without wrecking anything. In the example that is CHF 25,000 plus CHF 80,000 minus CHF 18,000, so CHF 87,000. Pension assets are locked and the car is not something you want to sell in a crisis. The emergency fund lesson works from this figure rather than the headline one.

If part of your portfolio is denominated in dollars or euros while your rent and health insurance are in francs, the franc value of the statement will move for reasons that have nothing to do with your decisions. Record the number in francs, since that is the currency of your liabilities, and treat currency moves as a separate line when you decompose the change.

What to take away

• Net worth is a balance sheet at a point in time: assets at fair value minus liabilities at amount outstanding, measured on the same date each quarter and in francs.
• Your Swiss taxable wealth and your economic net worth are different numbers, mainly because pillar 2 and pillar 3a sit outside the wealth-tax base and property is carried at a cantonal tax value rather than market value.
• Decompose every change into contributions, returns and revaluation; below roughly the point where expected return exceeds annual savings, the savings line is the dominant lever and portfolio tinkering is not.
• Repaying debt does not change net worth on the day you do it; it changes the future path by removing an interest cost.
• Track net worth divided by annual spending alongside the absolute figure, and track liquid net worth separately, because the locked and the reachable parts of a balance sheet do different jobs.

Sources

• Swiss Federal Tax Administration (ESTV/AFC), Steuerinformationen dossier, chapters on wealth tax (Vermögenssteuer) and on the taxation of real estate.
• Federal Act on Direct Federal Taxation (DBG/LIFD) and cantonal tax laws, for the treatment of pension assets and the deductibility of debt.
• Federal Act on Occupational Old Age, Survivors' and Invalidity Pension Provision (BVG/LPP) and the Vested Benefits Act (FZG/LFLP), for the definition of the vested benefit shown on a pension certificate.
• Swiss Federal Statistical Office (BFS/OFS), Household Budget Survey (HABE), for household income and expenditure structure.
• Swiss National Bank, financial accounts of Switzerland, for aggregate household assets and liabilities.
• Franco Modigliani and Richard Brumberg (1954), "Utility Analysis and the Consumption Function", the origin of the life-cycle framework for household saving.
• John Y. Campbell (2006), "Household Finance", Journal of Finance — the presidential address that set out household balance-sheet research as a field.
• Thomas J. Stanley and William D. Danko, The Millionaire Next Door, for the empirical distinction between income and accumulated wealth.