It’s a simple formula: Net worth = Assets – Liabilites.
And yet without consciously thinking about it many of us fall into the negatives.
The Road to Riches Starts Here: Track Your Net Worth
- By : Menard
- Category : Financial Planning
- Tags: Net worth
Financial Planning
4
It may not be a surprise to my readers, but I have a confession to make. I’m obsessed with tracking our net worth. Every month, I update a spreadsheet to keep track of our numbers, in addition to logging into various sites that aggregate our financial data over the web.
I’ve been doing this for the past decade, and the result could not be any sweeter:
- Our household net worth grew almost six-fold.
- We don’t have any debt besides the mortgage, which I can pay off tomorrow if I wanted to.
- I’m no longer fearful of losing my job— the impetus for starting this financial journey.
It’s actually a healthy obsession. What more can be healthier if you no longer stress about money? Soon enough, work will be optional, allowing me to pursue passion projects that I care about and not my employer’s. That’s the magic financial independence can bring to the table.
If you’ve never tracked your net worth before, there’s never a better time to start than this brand new decade. 2020 is an excellent time to start getting a 20/20 hi-definition view of your finances.
How to calculate your net worth
Simply put, your net worth is the sum of all your assets minus the sum of all your debts or liabilities. It gives an overall picture of where you stand financially.
Net Worth = Assets – Liabilities
Notice that your income is not even a factor in the equation. In contrast to many garbage celebrity net worth “calculations” you’ve read over the web, the number is not impacted whatsoever by what you make— it’s what you keep that counts.
The details are equally simple yet often debated. But here are my guidelines:
- Do include the market value of your primary home (not just your equity) in the asset category.
- Include retirement plans (e.g., 401k, IRA, etc.), savings, and other financial assets.
- Include any pensions if you have a lump sum number.
- College savings under your name like 529s, even it’s for your kids, should be included.
- You can add the depreciating value of your cars and other valuables if you owe a balance on them.
- All mortgages, loans, credit card balances, and other debts get subtracted.
Where do you stand?
Whether it was Mark Twain or Theodore Roosevelt, whoever said, “Comparison is the thief of joy” left an important detail. Sure, comparing yourself to others may be a misguided endeavor as everyone has a unique lifestyle, values, needs, and expectations.
But comparing yourself to where you were last year could be a joyous occasion if you’re on the right track. Even then, it takes more than “joy” to motivate someone to succeed.
The chart on the right (or above if you’re using your phone) provides the median U.S. household net worth by age. It’s a good starting point if you’re interested in comparing yourself to others.
But who wants to be average? Everyone reading this blog should aim for ten to twenty-five times the 50th percentile number.
Real-life case studies
Rather than provide you with hypothetical examples, I came up with interesting real-life numbers taken from one of my favorite sites, networthshare.com, and provide some commentary for each one. You’ll see that the numbers themselves provide a story.
Case study #1: Joe is living way beyond his means
Joe (not his real name), 32yo, works as a computer programmer. Hence, he makes a good income– easily over $100K. He’s lucky not to have any student loan debt to speak of probably because of a scholarship, or his parents paid for his tuition.
| Assets | Value | Liabilities | Value |
|---|---|---|---|
| Cash | $100 | Credit Cards | $51,629 |
| Home | $270,000 | Car loans | $71,345 |
| Cars | $39,000 | Student loans | $0 |
| Retirement | - | Mortgage | $261,000 |
| Total Assets | $309,100 | Total Debts | $389,782 |
Rather than taking advantage of the situation, however, he accumulated a combined $122K of consumer debt in which $71K is on cars— a depreciating asset! Not surprisingly, he owes more on his cars than what they’re worth and no retirement savings.
With that amount of debt, it’s no wonder his net worth is negative.
Joe’s net worth = $309,100 – $389,782 = ($80,682)
To the average Jane, Joe is a successful college-educated guy, doing very well for someone in his 30s— great income, owns a nice home, and a very impressive car to boot!
But the numbers do not lie. Joe is in debt to his ears, and barely scraping by.
Where it not for Joe’s income, the bum across the street, where Joe lives, who didn’t get approved for any loans, is probably a better catch— at least, he got a zero net worth.
Of course, it’s not too late for Joe to straighten his act, he’s only 32.
(If I were Joe, I’d sell the car to a private party, borrowing the difference— he’s underwater— from a credit union at a much lower interest rate. I’d buy a $2,000 used car in cash, eat rice and beans while paying off the remainder of the debt, Dave Ramsey style.)
Case study #2: Jack is definitely killing it
Jack (not his real name), 34yo, works as an architect. Hence, he also makes good money. But unlike Joe, he hates debt. He once got saddled with 45K student loan debt, which he aggressively paid off in a few years. He vowed never to take out stupid loans again.
Instead of blowing his money on nonsensical consumer items and flashy cars, Jack maxed out his tax-sheltered accounts like 401(k)s and IRAs. The rest went into a taxable brokerage account and private company stock, investing mostly in index funds.
| Assets | Value | Liabilities | Value |
|---|---|---|---|
| Cash | $42,998 | Credit Cards | $0 |
| Cars | $47,838 | Car loans | $0 |
| Retirement | $659,150 | Student Loans | $0 |
| Stocks | $167,410 | Home Mortgage | $447,620 |
| Home | $618,000 | Other Mortgage | $60,824 |
| Other Real Estate | $190,000 | ||
| Other | $20,965 | ||
| Total Assets | $1,746,361 | Total Debts | $508,444 |
It’s no surprise he can contribute the maximum to all the accounts— he has no credit card debt or car payments.
As a result, he has a very impressive net worth for his age— a millionaire in his 30’s.
Jack’s net worth = $1,746,361 – $508,444 = $1,237,917
One important detail that separates Jack from Joe is that he’s been obsessed with tracking his net worth. Like me, he’s been doing it for the past 10 years!
Too bad for Jane, Jack is already taken by Jacqueline. They already have one kid.
The easier way to track your net worth
Networthshare is great for tracking and sharing your net worth. But it’s not a tool designed for managing your finances.
The best way to build wealth is to get a handle on your finances by signing up with Personal Capital. They are a free online platform which aggregates all your financial accounts on their Dashboard so you can see where you can optimize.
Before Personal Capital, I had to log in to multiple systems to track 12 different accounts (savings accounts, credit cards, 401K, etc). Now, I can just log into Personal Capital to see how my investment accounts are doing, how my net worth is progressing, and where my spending is going. You also get your net worth amount sent to your inbox weekly.
