#14. Knowing Your (Net) Worth
Updated: Jan 22
Keeping track of your net worth is equivalent to having an annual checkup with the doctor that includes bloodwork. Getting the annual doctor checkup may not be necessary, but if you want to optimize your health as you age, it is vital. How do you avoid high blood pressure becoming a major issue? Identify it as early as possible and treat it. The same goes for many other ailments or conditions as you age, such as issues with your sugar levels.
Think of tracking your net worth like the annual doctor checkup. It may not be a necessary step to achieve financial success for some, but if you want to get nerdy with your finances and optimize every dollar, tracking your net worth is a must. Knowing your net worth every year requires you to do a deep dive into your finances. This forces you to diagnose any issues you are having.
Getting started with anything in life is one of the hardest parts. New information is scary. If you keep a general track on the numbers in your checking and savings account, you may have an idea where you stand financially. But you are keeping your relationship with your finances at arm’s length. To get a real grip on your financial health and your future, you must have an intimate relationship with every dollar to your name. No, do not name each dollar bill, but feel free to nickname them 😉.
(Disclaimer: I do NOT receive any money or recognition (not even a pat on the back) if you click on any links in this article)
What Does “Net Worth” Mean?
The simplest way to explain your net worth is to implement the following formula. Assets minus liabilities = net worth. In other words, your net worth is how much cash you would have if you were able to liquidate your major assets, minus your debts. There are many sources out there that walk you through what to include in your asset column and what to consider as part of your liabilities. Personally, we use this tool to keep track of our net worth. There are many free resources out there as well (such as this post).
No matter the method you choose, please make sure to do three things immediately:
Do it again once every year moving forward (I have read how some people track it weekly. I am not a fan of this, but if that is what it takes for you to stay financially fit, do it!)
Compare your net worth to previous years and see if there is anything you need to change.
If you can manage to do these three things moving forward, you will undoubtedly become financially fit.
How To Calculate Net Worth?
You will first want to figure out what to include in your “asset” column. The major assets I include are cash, investments (tax free, tax deferred, and after-tax), business interests, and property. I will go through each in turn.
Cash – add together everything that is in your checking and savings account. Then, determine whether you have any other cash assets. Others include CDs (certificates of deposits), funds in an HSA (or "health savings account) if being used as cash for medical expenses (Fun fact: an HSA can also be used as a very valuable investment tool), and funds in a high yield savings account (HYSA). If you keep large stacks of cash in your mattress or in a safe, add that to this number as well. Once you add all these things together, move onto the next asset.
Tax free – this includes any Roth accounts or HSA being used as an investment tool. You can choose to designate many accounts as a Roth account, such as Roth 401(k), Roth 403(b), Roth 457, or Roth IRA. Generally speaking, Roth dollars are taxed up front, but then any gains made in your Roth account are tax free, as long as certain criteria is met.
Tax deferred – The most common and well-known tax deferred account is the 401(k). Tax deferred simply means you do not pay taxes on the money being put into the retirement account until those dollars and any gains are withdrawn later. Other examples of tax deferred accounts are a 403(b), 457(b), or traditional IRA.
After-tax – This would be your typical brokerage account. There are many reasons to have a brokerage account, but one of the primary reasons people invest in a brokerage account is to have access to your money prior to 59 ½ years old**. I call these accounts the “sexy” ones because there are tons of way for you to use them, such as stock picking or day trading. However, I like to treat our brokerage account like our other retirement accounts and invest in low-cost index funds. Thus, our brokerage account quickly became unsexy again.
Once you add all your investments together, time to move on!
Business interests – this will be very different for everyone. Most people might not have any business interests to include in this section. If you own an LLC or another business, this is where you would put the value of the business. People value businesses in vastly different ways, which includes how much physical inventory they own or how much they could sell the business for. Personally, I always lean to the conservative side on our assets, and that includes our business interests. Undervaluing has far less impact than overvaluing your net worth.
Property – The primary asset here will be a person’s primary home. Just like a business, valuing a person’s primary house can be tricky, albeit easier than valuing your business. Again, I like to be conservative in the asset column, so I like to stick as close to the purchase price as possible. Other property assets could include a vacation home, vehicle (please do not overvalue a vehicle), gold or jewelry. Do not include general personal property, such as household items, in this category.
Now, add together your totals in all four categories (cash, investments, business interests, and property), and you have your total assets number!
Figuring out liabilities is usually easier than figuring out what specifically goes into your asset column and how to properly value those assets. Another word for liabilities is debts. The most common debts are credit cards, student loans, car loans, and mortgages. It is very difficult to run from debt, so adding together all your debts to figure out your total liabilities should be quick.
Now, take your total assets, subtract your liabilities, and you officially have your current net worth.
What Does Your Net Worth Mean?
Simply put, the more assets you have and the fewer liabilities you owe, the closer you are to financial independence. Keeping track of how your net worth changes from year to year is an excellent way to keep you motivated! Showing your net worth increase in a cool chart is also a great way to get an uninterested spouse excited about finances.
Focusing on increasing your assets and decreasing your liabilities should also keep you from buying that $100,000 car (unless you can truly afford it).
How Do I Know If My Net Worth Is On Track?
Look no further than Thomas J. Stanley’s book, The Millionaire Next Door. In this groundbreaking book, he introduced a formula that I really like to determine how good you are at accumulating wealth.
What Mr. Stanley proposes is that you multiply your age by your gross income, then divide by 10. This number tells you where your net worth should be. Therefore, if you are 30 years old, and you make $100,000 a year in gross income, your net worth should be $300,000 (30 x $100,000 / 10). If you have managed to accumulate twice that number, Mr. Stanley calls you a prodigious accumulator of wealth.
If you have not reached where your net worth should be, do not stress too much. Figuring out where you are is just the first step.
What Is Our Net Worth?
I am 33 years old, and my wife is 31. Our combined income for 2022 will be roughly $110,000. The average of our ages (32), multiplied by $110,000, and then divided by ten is $352,000. Our current net worth stands at $186,134.18.
My wife and I officially started our FI (financial independence) journey this year. As I have stated before, I started to learn about the FI movement, including the FIRE (financial independence retire early) movement, after I turned 30 years old. I immediately fell in love with it, but I did not take any real actionable steps to make that dream a reality. That all changed recently when I started The Seven-Year Time Challenge.
Yes, we are not where we should be financially, but I am okay with that. I am no longer scared of our finances and am using this knowledge to achieve our desired outcome. We are making conscious decisions as a family, and it feels amazing.
I am looking forward to 2023. I plan to start the year off by letting you all know about our investment journey and how it led to our current net worth. Next week I plan to publish a personal post telling this story. Like us, if you are not where you should be financially, I hope today’s post and next week’s post about our journey will give you some hope that financial success is possible for you.
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Have a wonderful New Year!
**59 1/2 is a very important age among retirees. The general rule is that you cannot have access to your tax free and tax deferred retirement accounts without receiving all the tax benefits until this age. There are exceptions to this general rule. Read here for more information.