Wednesday, May 12, 2010

Don't Know Much Accounting, But...

In an article in the forthcoming New York Times Magazine, the author of the Times's "Your Money" column writes:

Net worth is the number you get when you subtract what you owe from what you own. You start with things like cash on hand, retirement savings and home equity and subtract your mortgage, as well as credit-card, student-loan and other debts.

That, of course, is wrong. You can count the value of your house and subtract your mortgage, or you can just use the result, which is home equity. But don't subtract your mortgage twice, or your net worth will look pretty bad.

The "what you own minus what you owe" formulation is deceptive, because it invites you to confuse two different sense of "own," as here. Note how widespread (even among specialists, though I'm sure this was a momentary aberration) the confusion is about gross and net. Not to mention levels and changes: how many Americans can tell you the difference between the debt and the deficit? Add these to the list of mathematical ideas that are more important for citizens than trigonometry.

1 comment:

  1. Bottom line: Where do I invest my money?