Who is the millionaire?

**altwebdesign** · 10-07-2010 06:39 PM

e.g 3 guys

1st guy has a fully owned 1million pound/dollar house and 1million cash in the bank no debts etc

2nd guy also has a fully owned million pound / dollar house has 500k cash in the bank but has items such as sports cars totalling 500k

3rd guy owes 500k on a 1mil house has zero in the bank

Would you consider them all to be millionaires based in the fact they have 1million cold hard cash, im pretty sure you would

but what about the guy who dosent have a million in cash but has assets totalling over a million and the guy who lives in the million pound house yet is 500k in debt?

**akula** · 10-07-2010 10:36 PM

no you would not "consider them all to be millionaires" equally.
balance sheets need to adjusted for risk.
for example; there is a difference between a guy holding $1m in cash and a guy holding $1m in short wheat futures.
on the balance sheet, they both hold 1m in assets, but in reality, one is poorer than the other on risk adjusted basis.
this is the whole point between Basel 3 and regulators being able to compare businesses on like-for-like basis

anyways, the calculations;

net worth = (assets - liabilities)^-(risk discount)

1. net worth = (1m+1m -0) = $2m, but the $1m home has to be discounted for risk. the $1m is still gonna be worth $1m next year. The house maybe, not.
2. net worth = (1m+500k+500k-0)=$2m, but, again this has to be discounted for risk. guy 2 has less cash than guy 1, so on risk adjusted basis, his net worth will be less than guy 1, even though that on the balance sheet they are identical.
2. net worth = 1m-500k=500k (undiscounted for risk)

**Lambo** · 10-11-2010 10:55 AM

the real question is are you a millionaire? and if not what are you doing to change that?

**JKansas** · 10-12-2010 03:41 PM

Totally random but, cars in that price range are rarely solid "assets." The risk is the price paid to dump them quickly or the depreciation if you hold them. Until you get into true collectors this is the case. Not saying the guy isn't wealthy, just that his cars are not worth the same as 500k in cash.