A reader proposes a net worth monitor to help keep humans out of debt
By Julia Thomson
Imagine a net worth monitor available on every major financial institution’s web site designed to help manage a customer’s debt. Upon initial set-up, this monitor would provide a template, guiding customers to dynamically link asset balances and outstanding loan balances for all non-retirement financial accounts, and might also allow them to link a Kelley Blue Book value for their cars and an estimate for their home (based on values from Zillow, also called Zestimates) for a more complete net worth picture.
While the option to include tax-deferred accounts such as IRAs and 401(k)s would be available, the default option in the template would advise customers against the inclusion of these assets, since they are expensive to access and inappropriate for paying down debt. (The option to include 401(k) and IRA assets could be used by older, more sophisticated people with large retirement portfolios—people who are less likely to panic and sell in a market downturn, especially if the rest of their balance sheet is healthy.) However, non-retirement brokerage accounts would be included, since the assets in them could – and probably should – be used to pay down any consumer debt.
Once all of the links were established, a customer’s non-retirement net worth would be instantly calculated, and he would see an updated number every time he logged into his financial institution’s web site, without having to view the individual balances unless he wanted to. There would also be immediate feedback such as a thermometer-type chart showing red for negative net worth, moving to green for positive net worth.
In addition, there would be some simple mapping with pictures, allowing a client to understand in concrete terms how her net worth might translate into real-life events. For instance, there could be a picture indicating the danger of bankruptcy for a large negative net worth, or there could be a picture of the one person smiling during a mass layoff for a positive net worth, to illustrate the importance of having a financial cushion in case of job loss. In addition, there could be information about how a person’s net worth stacked up against their peers, either by age, income or both. (CNNMoney already has such a calculator that allows individuals to enter their age and income and then see the median net worth for both groups.)
The immediate feedback could alert people that they need to take action, and that simply shuffling debt around would not really impact their net worth. It might also make people pause before buying a new car, or otherwise incurring more debt. The monitor would ideally serve as a way to organize a number of activities recommended by financial professionals, but not typically practiced by most people, such as tracking expenses, paying extra on debts, cashing out assets to pay debts off, or simply saving more aggressively. Because these disparate activities actually would impact their net worth calculation, people would have an incentive to engage in them.
Financial institutions would have at least a couple of incentives for providing such a tool: The opportunity to consolidate outside assets, and the opportunity to get in front of clients who are unhappy with their current net worth (Schwab, my former employer, was always more than happy to help people set up automatic deposits into their Investor Checking account!).
To be effective, such a monitor would be the first thing a client sees upon logging into her financial web site. I believe that such an immediate feedback mechanism could have a huge positive effect on debt loads and savings rates in this country.