Are you worth more than Donald Trump?

I’m not talking about personal value here, but net worth. The net worth of the richest people can be fascinating. Bill gates has $86 billion. Warren Buffett, coming in at #2 on the list, has $75.6. But has anyone’s net worth been discussed as much over the past year as Donald Trump’s?

The Forbes list puts him at #544 in the world, and #201 in the US, with a net worth of $3.5 billion. But where does this figure come from? It is, after all, an estimate, not a print-out of his bank statement.

Of course, calculating the net wealth of a very wealthy person is much trickier than for someone with less. Most of us have a certain amount in our wallets, and our banks accounts. And we might have a figure of the equity we own in our home. Add those together, plus an estimate of the value of your belongings, minus any outstanding debts, and voila, there’s your net worth.

If you’re extremely wealthy, however, there are fluctuating markets to contend with, exchange rates on foreign investments, the inexact science of property valuations, and all sorts of other vagaries to contend with.

But while Trump’s net worth will always be an estimate, is it a good one?

Trump first arrived on the Forbes List in 1982, with an estimated fortune of $200 million. This included an ‘undefined’ share of his parents’ estate. Although he made the list as a billionaire in the 1980s, his name was dropped between 1990 and 1995. Then, he is reported to have borrowed from his siblings’ trusts following business losses.

The 2017 Forbes figure is certainly a long way off of Trump’s own estimate. The one-page financial summary he released upon announcing his candidacy for president showed a net worth of $8.7 billion. (Actually, the very precise $8,737,540,000). Just a month later, he stated his net worth was ‘in excess of ten billion dollars‘. If Trump had really increased his net worth so colossally in a month, that would represent almost a 7% monthly return. If he could keep that up, he’d more than double his money every year!

This 7% disparity we might chalk up to an acceptable margin of error. More troubling is just how wildly Trump’s own recent estimates differ from the Forbes assessment. Forbes estimates Trump has only around a third of the money he says he does.

How could such an enormous disparity occur?

A book I recently read, The Making of Donald Trump by David Cay Johnston, sheds some light on this. In responding to a question posed to him during a court case, Trump intimated that his estimates of his net worth go up and down based upon his feelings:

“Even my own feelings, as to where the world is, where the world is going, and that can change rapidly from day to day. Then you have a September 11th, and you don’t feel so good about yourself and you don’t feel so good about the world and you don’t feel so good about New York City. Then you have a year later, and the city is as hot as a pistol. Even months after that it was a different feeling. So yeah, even my own feelings affect my value to myself.”

But  the commonly accepted definition of ‘net worth’, defined on Investopedia as it applies to both individuals and to businesses is ‘the amount by which assets exceed liabilities.’

You’ll note that the word ‘feelings’ doesn’t occur anywhere in that definition at all. Nor does it occur on the rest of Investopedia’s page on the topic.

The book continues:

“When you publicly state what you’re worth,” the lawyer asked, “what do you base that number on?”

“I would say it’s my general attitude at the time that the question may be asked. And as I say, it varies,” Trump replied.

You are probably worth more than Donald Trump

In 1990, Johnston, working for the Philadelphia Inquirer, wrote an article headlined ‘You are Probably Worth More Than Donald Trump‘.

At the time, Trump was claiming that he had a net worth of $3 billion. About what Forbes says he has now.

But an actual net worth statement, prepared by Trump’s banker, which Johnston got hold of, showed he was worth -$295 million. Yes, negative $295 million. Meaning that anyone in debt, so long they owed less than $294,999,999.99 could legitimately claim to have a higher net worth than Trump.

Why would Trump’s assessment, and the banker’s diverge so wildly? Other than Trump’s feelings and attitudes?

The negative sign at the beginning gives us a hint. Aside from possibly inflating his estimated assets because the sun was shining or some other reason, it’s very likely Trump failed to take into account his liabilities.

And as we’ve seen in the definition above, that’s one whole half of the net worth equation.

It’s assets minus liabilities, or what you own minus what you owe.

The word ‘net’ is really important.

Consider our friends Abby and Bobby, and Gabby and Halley. Both couples bought houses costing $500,000. Let’s say both couples also have about $20,000 worth of other assets (the resale value of household goods, a car, whatever). And $1000 in cash in their bank accounts.

Now, $500,000 + $20,000 + $1,000 = $521,000. Nice and easy.

Both couples have assets totaling $521,000.

A Trumpian ‘net’ worth calculation might stop there. Or it might add on a few thousand more if the birds are singing and there’s going to be a good show on TV tonight.

But of course this is not yet a net worth calculation.

If you’ve read the case study, you’ll know Abby and Bobby paid a 20% deposit for their home, while Gabby and Halley saved no deposit at all. Let’s imagine they preferred to spend the cash that Abby and Bobby were busy saving on dining out, having coffee every day at the office, buying their lunches, going out to bars, gambling, smoking, cable television, expensive mobile phone contracts, and other ‘little luxuries’.

Abby and Bobby’s borrowings total just $400,000 ($500,000 minus their $100,000 (20%) deposit).

Meanwhile, Gabby and Halley, went one step further and borrowed a $25,000 extra to finance a holiday to celebrate the purchase of their home. Because they had no deposit, they were required by the bank to take out Lender’s Mortgage Insurance. This added another $25,000 to their borrowings, bringing their total debt to $550,000.

How to calculate net worth:

To calculate Abby and Bobby’s net worth, we simply subtract their liabilities (what they owe) of $400,000 from their assets (what they own) of $521,000:

$521,000 – $400,000 = $121,000

To calculate Gabby and Halley’s net worth, we similarly subtract their liabilities of $550,000 from their assets of $521,000:

$521,000 – $550,000 = -$29,000

Although their assets are the same, the net worth of these couples is vastly different. Abby and Bobby are a massive $150,000 better off than Gabby and Halley, whose net worth is in the negatives.

Where did all their money go?

First of all, none of the ‘little luxuries’ Gabby and Halley bought count as assets. The cigarettes are smoked, the coffees are drunk, the movies are watched. They have no enduring value. The $100,000 Abby and Bobby saved and used as a deposit, however, gives them equity in their home.

The same is true of the expensive holiday Gabby and Halley took. Travel is wonderful (I’m traveling right now!) and it’s something that has lasting personal benefits. But it isn’t a financial asset you can sell in future if need be. Responsible travel is either a lifestyle (like a working holiday, or a digital nomad lifestyle) or it’s a reward for saving. Abby and Bobby can have an amazing holiday to celebrate paying off their mortgage in the not too distant future.

Even worse, the Lender’s Mortgage Insurance that Gabby and Halley had to take out because they didn’t have a sufficient deposit is not just not an asset. It protects the lender, not the borrower. Gabby and Halley’s bank won’t lose out if they fail to pay their mortgage. But Gabby and Halley themselves will still face foreclosure. Their decision to take out a loan without first saving a 20% deposit has dug them deeper into the red. And they get nothing out of it.

It’s what’s inside that counts

As these examples show, looks from the outside can be deceptive. From the perspective of someone who doesn’t have access to their bank statements and bills, Gabby and Halley appear richer. They spare no expense in their daily spending. They enjoy extravagant holidays. And still, they have a house worth as much as Abby and Bobby.

But the numbers tell quite a different story. Behind Abby and Bobby’s quiet facade, they have a whole $150,000 more than Gabby and Halley do. All thanks to the different choices they’ve made.

Why is this important?

Knowing your net worth is an important step in taking control of your financial future. If, like Gabby and Halley, your net worth is negative, knowing what you need to tackle will help you  turn things around. If, like Abby and Bobby, your net worth is positive, you can start to track how long it will take before you can make a big step in your life. Like taking time off to travel or raise a family, or perhaps even retire early.

Be honest

It’s crucial that you calculate your net worth properly, using reasonable estimates where actual figures aren’t possible. Don’t value your laptop at $800 because that’s what you paid for it and it looks better on paper. Chances are, you might only get $100 for it if you’re lucky.

This isn’t an insurance estimate where you’re looking at what it would cost to replace your items, new for old.

This is an estimate of how much you could get for your assets if you had to sell them.

Unlike the case of Trump’s net worth, if you’re not honest, nobody will spend ages discussing what a more accurate figure might be. (Well, except the bank manager or tax department if you mislead them!) It’s in your own interest to make reasonable estimates, and to be as complete as you can.

Over the next few posts, I’ll show you what you can do with your net worth.

Who knows, you might even turn out to be wealthier than Trump (at least, 1990s era Trump)!

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