After many years tracking my assets and liabilities, I came to the conclusion that at the end of the day, the one key indicator to financial independence is your net worth. People often think that when you talk about net worth it is only for ultra rich and wealthy people. I remember when I entered the investment and banking world right out of college, I would hear net worth and all I could think of was that guy on tv, what was his name? Yes, Robin Leach in Lifestyles of the Rich and Famous. Remember? All them huge mansions and expensive sports cars like Lamborghinis and Ferraris. That was the first thing that would come to my mind when I heard that word. Lifestyles of the rich and famous of the mid 90’s.
Now as an adult, more mature and perhaps more financially savvy, I no longer think of these images and videos when I hear the word net worth. I think of me now. Now I do not mean this is a bad way that I have become rich and famous. But I have become more aware of why net worth is so important at any age. I don’t consider myself rich but after looking at my net worth I believe statistically I am in the 1%. I don’t know if that makes me rich, but it sure does give me some freedom to do certain things that most folks cannot do. But anybody can make it. It is no secret. All it takes is dedication, perseverance and making sound decisions with your finances. More important, saving, never losing track of the big long-term picture and discipline. And of course, the big one, keep track of your net worth.
What is Net Worth?
Net worth simply means what you would leave your spouse and kids if something were to happen to you today. If all you have is a savings account with $1,000 in it and a car worth $500, well that is your net worth. $1,500. If you add a $10,000 credit card debt to the mix, then you net worth is negative -$8,500. You leave your spouse and your children with a debt of $8,500.
The key is to monitor your net worth monthly and yearly. If your net worth is going down month-to-month then you need to make some serious adjustments. If it is going up, then it means you are doing the right things. This is why is very important to keep track of it. This is the only way, a quick way, to tell if you are messing up in your finances or not. It is the big picture. Think of it like getting on a helicopter and seeing your financial life from above, in the sky. You will be able to see if a lake in your land is filled with toxic waste or if a tree is getting ready to fall. Once you see the big picture and you land from your net worth helicopter ride, you can tackle the issues. You can concentrate on taking the toxic waste from the lake or plant more trees. You get my point.
My net worth in 2020 has increase by 15%. You may be wondering how is this possible with the coronavirus and the economy in such bad shape. Well, the stock market has rebounded and my portfolio is up. I also purchased a home in 2019 that has increased in valued by almost $200,000 in less than a year. Not bad. Most of my money I make from the stock market. But real estate helps. Home prices have gone up during the pandemic which is somewhat odd. But this may change come 2021. I may write a blog post on this later. But back to net worth. I will break down how you calculate your net worth.
Assets
This is everything that you own. Add everything up of all the things that you own. There are lots of spreadsheets and apps you can use, but like I always say, sometimes you can have all the tools and technology in the world but if you do not use them, it is not any good. Just get a sheet of paper and write on each line what you own and put a value to it. Something like this:
| MY ASSETS | |
| Savings | $4,000 |
| Checking | $6,000 |
| Emergency Fund | $20,000 |
| 401k | $100,000 |
| House | $500,000 |
| Car | $10,000 |
| Jewelry | $10,000 |
| Total Assets | $650,000 |
There you have it. Your total assets. You are probably thinking, but Economy Chief, I still owe money on the house. Yes, yes, we will get to that. That goes in the Liability section of the net worth.
Liabilities
Liability is money that you owe people, businesses or the government. I put government because every three month I have to send a fat check to Uncle Sam for my estimated income taxes. So let’s look at the Liability. Again, just get a sheet of paper and write down on each line all the amounts that you owe people. Loans and debt. Like this:
| MY LIABILITIES | |
| Credit Cards | $1,000 |
| Car Loan | $4,000 |
| House Mortgage | $400,000 |
| Student Loan | $45,000 |
| Total Liabilities | $450,000 |
Now that you have your assets and liabilities in order. One sheet of paper for each, then we can get our net worth. Net worth is an equation.
Net Worth
Assets – Liabilities = Net Worth
So if we subtract liabilities from assets you get your net worth. It is what you own outright. If you decide to pack your things and leave to an island, this what you will take with you. Here is the result using our example above. Our net worth:
| $650,000 | – | $450,000 | = | $200,000 |
You can see that your net worth is $200,000. This is the number you want to track and increase year after year. I track it monthly. If you can do that, then great because it can tell you quickly if you are not doing well or are perhaps making investments and financial decisions that are not prudent and making you lose money as oppose to making money. I want to know if I am making these mistakes soon so I can make changes to my financial strategy monthly as opposed to waiting until one year. Basically, I get on my net worth helicopter for a quick one-hour ride every first of every month. This helps me take action when I get off the helicopter so that if I need to cut a tree that is dead from my net worth land, I can do it right away. I don’t want that rotten tree to dirty my drinking water from my lake.
Track and Track Some More
You have to stay on top of your net worth. You have to review it monthly and weekly. Better yet, daily. This is the only way you will be able to see if you are on the right patch to getting to where you need to be. Don’t worry if you net worth is not much. We have to begin somewhere. I remember when I was out of school. My net worth was all debt. Although net worth to me back then was how many girlfriends I had. Okay Economy Chief, let’s get serious now. Back to net worth.
Here is a sample of the spreadsheet I use to keep track of my net worth. Like I said, you do not need all the technology or tools in the world to know that you are either broke or have a nice nest egg. These are not my real numbers of course. I changed the numbers around so you can see how it should look like.
Set Net Worth Goals
It is important that you set net worth goals. I set my goals yearly. But I track them monthly to see if I am getting to where I need to be. One of my goals is to reach $10 million net worth in ten years. If all goes well I may be able to reach it. But even if I just get to $5 million, I am still ahead. I recommend that after you get a picture of your net worth, you set yourself net worth goals. Set realistic goals. It is okay to set goals that are a bit higher than what you think you can reach. However, it is important to initially set goals that you can reach, at least for the first two to three years. That way you are not disappointed if you do not reach them. You want to set goals that you can attain so that every accomplishment motivates you to continue.
That is all for now. Good luck and please share this post on Facebook and tell your friends and family about the blog. Also visit our Facebook page and give it like so you can follow me. www.Facebook.com/TheEconomyChief
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