Freed by 50

What is a “paper millionaire?” As defined by Investopedia:

“A paper millionaire is an individual who has achieved a high net worth as a result of the large total market value of the assets they own.”

For many people that religiously track their net worth, this is a big milestone. The r/financialindependence subreddit is awash in stories about how people reached “millionaire status” by becoming paper millionaires.

I’ve said many times on this blog that I don’t find net worth to be a great metric. It’s highly subjective, how it’s tracked varies depending on who you ask, and it can make you overconfident in your savings. Still, I track my net worth on the 15th of every month as a gauge of how I’m doing this month compared to last month. I’ve even put together a spreadsheet that tracks all of my expenses, my projected income from investments, and calculates my time to FIRE based on those numbers.

Investopedia goes on to explain about paper millionaires:

“Paper millionaires tend only to be temporary ones. Only by aggregating their theoretical digital net worth, such as based on the current market value of their securities and assets, can they hit the millionaire mark.

However, it is important to note that paper millionaires are not the same as true millionaires, which generally refers to people who have more than $1 million in cash in the bank. This is because the value of the security or securities that rose so significantly as to have caused the gains can just as easily fall again in price.”

https://www.investopedia.com/terms/p/papermillionaire.asp

Therein lies the problem, and the reason I won’t celebrate my newfound paper millionaire status.

With the stock market and housing values at all time highs, I crossed into paper millionaire territory sometime this summer. I didn’t actually notice because on my net worth spreadsheet I value my home at the price I purchased it, so I still saw this number as being somewhere off in the distance. However according to Zillow, Redfin, and the last person to sell a home on my street, my house is currently worth $300k more than I paid eight years ago, which puts my net worth at just about $1.1MM. Wow!

So why wouldn’t I want to celebrate such an important milestone? For one, it feels hollow. I couldn’t come up with a million dollars if you asked me to, and the only way to see my paper millionaire status is to hold my Fidelity statement in one hand while looking at my house and squinting really hard to see all the equity. I’ve also talked about how I really don’t believe in equity as cash in hand quite a bit, so this shouldn’t come as a surprise.

Also, since home values and the stock market tend to fluctuate quite a bit, this is a milestone I’d get tired of celebrating each time I reached it. I’d be setting myself up for disappointment each time I lost this status. 2020 was obviously an anomaly for stocks, but a large part of my brokerage account is in VTI, which was trading as high as the $170’s in early 2020, and as low as the $110’s in mid 2020. It’s now trading in the $230’s. And this is a total stock market index which should be a relatively stable benchmark in comparison to other funds. The same could be said in reverse for home prices, which have skyrocketed in the past 18 months. I have actually hit this milestone three or four times in the past year and haven’t known it.

Moreover, I feel this is a dangerous milestone to reach, as it gives some people an overinflated sense of confidence in their financial state. The aforementioned subreddit is loaded with paper millionaires who are ready to tell you about their rise to fortune and how it’s brought them within striking distance of their FIRE number. Anecdotally, I know plenty of people who have told me that they’re a millionaire, only to find out that half of their million dollars is equity in their home, and that the home isn’t paid off. In this case their investments would hardly spin off enough to pay the bills if they decided to retire as a “millionaire” tomorrow. Also many people who I interact with that identify as paper millionaires start to spend frivolously more often because they feel like they’ve “made it.” While I completely agree with rewarding oneself for a job well done, unless your financial goal was to be a paper millionaire at exactly $1,000,000, you’ve probably got a ways to go before you can go out and get that new car.

I’m not in any way trying to downplay reaching the status of paper millionaire. It’s an amazing feat that the majority of the planet will never achieve. For me, it’s affirmation that everything I’ve been doing for the past decade is paying off, and that I’ll actually be able to retire someday. For now, though, I feel less like a millionaire and more like Homer Simpson’s relative that plays a millionaire at parties…