Measuring Wealth Beyond Currency
07 Mar 2025home > blogs
Measuring Wealth in Currency
Most people measure their net worth in terms of their local currency. I was doing that too, for many years. What’s the problem with that? Let me illustrate with an example.
Let’s take a food item that we use regularly - Eggs.
- In 2000, the price of a dozen eggs in the U.S. was $0.91.
- In 2020, the price had increased to $1.51.
- The increase in the price of eggs is another discussion.
If you had kept $100 in cash at home from 2000 to 2020,
- In 2000, you could buy 110 dozen eggs.
- In 2020, you could buy only 66 dozen eggs.
- While your money stayed the same ($100), your purchasing power has decreased by 40%.
Instead of keeping cash, if you had invested $100 in the market at a 10% annual return, it would have grown to $673 by 2020.
- In 2000, $100 could buy 110 dozen eggs.
- In 2020, $673 could buy 445 dozen eggs.
- While your money grew 7x, your purchasing power grew only 4x.
This is the simplest explanation of inflation. Though the net worth has increased a lot in terms of dollars, the real-world purchasing power has not.
Measuring Wealth in Gold
With that understanding of inflation and purchasing power, we would be fooling ourselves with inflated numbers if we measured our net worth only in terms of currencies. We need a third entity to measure the purchasing power of the currency. It could be eggs, oil, broccoli, chicken, gold, silver, or a piece of land in a specific place. It could literally be anything that has some intrinsic value.
I’m using gold to measure my net worth. Why?. Because gold is not cheap like eggs and not overpriced like Bitcoin. It’s globally recognized and easily traded. It has been a store of value for thousands of years and no other currency has lived that long.
Let’s apply the same logic to gold,
- In 2000, the price of gold was $279.29 per ounce.
- In 2020, the price of gold was $1,773.73 per ounce.
If you had $1M in 2000 and invested it at 10% annual return, by 2020, you’d have $6.73M.
- In 2000, you could buy 3,580 ounces of gold.
- In 2020, you could buy 3,794 ounces of gold.
- Your dollar amount increased 6.73x, but your wealth in terms of gold increased only 6%.
The question we should ask is,
How many ounces of gold can I buy with my net worth today compared to a year ago?
If the number of ounces increases over time, then net worth has grown. If not, then what appears to be a net worth increase may simply be an illusion caused by inflation.
How do you measure your wealth?
Notes
- This article is a simplistic reduction argument of a perspective, ignoring market volatility, monetary policies, and supply/demand factors.
- The numbers used are approximate and illustrative, not precise calculations.
- This is not financial advice to invest in gold - just a different perspective to view net worth.