One Number Doesn’t Tell The Whole Story

Pretend you had two conversations with people about their net worth.

Person 1 reveals:

“My net worth went down by $200,000 last month.”

Person 2 tells you:

“My net worth went up by 50% last month.”

Chances are, upon first reading that you would think that Person 2 is making all the right moves and that Friend 1 is in trouble.  Big trouble, most likely, considering that most people would see most or all of their net worth disappear with that kind of loss.

And, if you had to ask someone for financial advice, you might even choose Person 2.

That might be the wrong move.  It could even devastate you.

What if you found out a little more detail, such as:

Person 1 had a net worth of $5,000,000 going into last month.

Person 2 had a net worth of $1,000 going into last month.

That would change things a little bit.

Person 1 would have lost 4% of their overall net worth.  This is bad under any circumstance, but look at May, when the stock market went down around 7%.  It’s very conceivable that a high net worth individual with a lot of stocks could have had such a month.

Person 2 did a great job from the percentage standpoint, but in reality, a $500 net worth increase doesn’t mean a whole lot, certainly not from the standpoint of asking advice or looking at one as a potential inspiration.

Chances are, if I were looking for financial advice, I’d probably choose the person that had just ‘lost’ $200,000 over the person that had just gained $500.  If you think about it, the person that lost the $200,000 also happened to get up to the $5,000,000 along the way.  More likely than not, the person who just ‘grew’ their net worth by $500 doesn’t have nearly the answers, experience, or knowledge to be looked upon as someone you want to follow.

Now, don’t get me wrong.  The person who just lost $200,000 could be a complete mess.  Maybe they inherited $20,000,000, in which case the fact that they’re now left with $4,800,000 is actually a pretty terrible circumstance.

Or, maybe the person who just increased by $500 started off with a net worth of negative $100,000 due to student loans and just got into positive territory after just a few years outof school.  In these cases, then yeah, the person who increased by only $500 might in fact be the person you want to look for in terms of advice.

My point is simple: Don’t focus on just one number.  Or even two numbers.

Look at the bigger picture.  In just about any finance related decision, there’s going to be a whole slew of numbers that you can look at.  You might not need or have the capability to understand or digest all of them, but the worst mistake you could make is focusing on just one.

Because, I’ll tell you, when you focus on just one number, for some reason it usually turns out to be the wrong one.

So, whatever decision you’re making, make the promise to yourself that you’ll look at the bigger picture.

You’ll thank yourself for it later.

Have you ever focused on one number that turned out to tell only a portion of the story?  How did it affect you?

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17 thoughts on “One Number Doesn’t Tell The Whole Story

  1. You bring up a great point about framing and how framing a question or problem can affect how you look at things. This is especially true about our finances.

  2. I completely agree. Making a decision based on one number is like buying a car based solely on a monthly payment. You really need the full picture in order to make the best decision. If you don’t understand something you should ask or investigate so you don’t kick yourself later.

    • That’s a classic technique by a car dealer is to get you to commit to a payment number. Then they work around that and it always comes in just a bit higher, but so close that I bet few complain or walk away.

  3. This one of the reasons, I very rarely discuss my net worth. For me it is just a way fro me to measure my progress. I think the only time I ever discuss it is with a banker, if I need a loan.

    • Every month you should be seeing that increase just a tad as your balances fall and your prinicple payments increase. It may not seem like a lot but it adds up. The key is not taking on any new debt.

      You could also calculate what percentage of your overall debt you’re paying off every month. Again as the principle gets higher and the total gets smaller, that will nudge up. It will be frustratingly slow for some, but I’m a bigger picture kind of guy so it works for me, especially when I step back and look at a year at a time.

  4. Oh so true. I have a ton of money conversations every week, and it drives me crazy when someone just concentrates on the “happy” number but avoids all other factors completely. First step, look at the big picture. Second step, fix the parts that are a problem instead of just concentrating on the stat that makes you happy…

    • Very true. The stuff that makes you the happiest probably needs the least attention, truth be told!

  5. Great point! It’s best to gather all the numbers or facts before coming to a conclusion. 🙂 Like when buying a house, the price of the home isn’t the only factor you should look at.

  6. So true! Some people fixate on one particular detail – but knowing the whole story is extremely important!

  7. How about the negative net worth to positive net worth flip?

    Of course, you’re right. It’s easier to sustain percentage growth when numbers are smaller – it’s sort of a sarcastic term, but the ‘law of small numbers’ applies well here. So if the US grows by 2%, say, while some other country grows by 8%? The 2% of the US usually contains many times the economy of the other country – even with that 8% included. Good stuff!

    • That’s an interesting thought. Yes, it does apply outside the ‘money’ realm if you think about it like that. Thanks for the thought starter.

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