Net Worth: It’s Really Going to Matter…Someday

I promised at the end of our post on spending tracking that we’d also be addressing and tracking one’s net worth. I’m a man of my word, so here we are.

Net worth is defined as total assets minus total liabilities (debt). Simple enough right, so why the post?

First, there’s some nuance involved in the categorization of assets and debt.

Second, and most importantly, despite the relative ease in calculating net worth, I speculate that very few have taken the time to calculate their own. Guys, forget early retirement. Failure to take note of the reality of your finances can leave you very much hosed by the fatty knot of life. Deliberate attention and a hard look at “normal,” however, can flip the script. There’s no better time than today, and we’re here to help.

Don’t You Want to Retire One Day? Know Your Net Worth?

Everyone out there very likely envisions themselves not working one day — and hopefully not a financial burden to someone else. Retirement is only possible though if a younger, self-motivated version of yourself got the little snowball that is your financial future rolling down the hill of life many years prior.

As you might suspect, delayed gratification is an absolute essential element to this game.

Here’s a hard fact: if you think there is a better time in the future to sort out your finances, guess again. That ship has sailed, but I hear there’s another boat on the dock now.

Hoping an inheritance will bail you out? Don’t count on it. For a variety of reasons, heirs will likely find far less money to inherit than expected, and not nearly enough to fund a retirement (reasons such as longer life spans, higher medical expenses, and equally-poor spending habits of parents come to mind). According to the Federal Reserve, the average inheritance for the middle 45% of heirs is $183,000. With the average household spending at nearly $70,000 per year, this is hardly a retirement plan.

But hey, you are a BAMF and don’t need anyone to bail you out, right? So let’s dig in on how to accurately account for your financial worth.

“What gets measured gets improved.”

Peter Drucker

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Assets

Let’s talk about the fun stuff — assets. Even if we’re starting low on the totem pole, I’m going assume you have at least a traditional checking and savings account with a bank. Assuming there’s some balance being held on both of those accounts, you have assets! Unfortunately for many, the total of the debts one carries will quickly negate any value of those assets, so it’s key to understand where you are starting from.

Below is a list of accounts where assets are held, categorized as either tax-advantaged (TA) or taxable (T).

Tax-Advantaged (TA): Investments can grow either tax-deferred (pay taxes later) or perhaps tax-free (e.g., HSA).

Taxable (T): Any money made each year is taxable in that calendar year. (e.g., capital gains in a traditional brokerage account).

More on the differences between the tax structure and tax timing on different investment vehicles can be found here.

• Employer Retirement Account (TA): This may be a 401(k), 403(b), or some other equivalent. Max these out as soon as you can!
• Health Savings Account (TA)
• Individual Retirement Accounts (TA)
• Traditional Checking and Savings Accounts (T)
• Taxable Brokerage Account (T)
• Home Equity

Refer to our investing strategy for more on these investment “buckets”.

Home Equity

If you own a home, your home equity is the value of the home minus the mortgage balance. Basically, this is the amount you would theoretically net if you sold your home, prior to realtor and other fees. You’ll obviously want to track your mortgage balance (discussed below), but it’s also important to have a running estimate on your home’s value.

It’s not practical or advised to have an official estimate completed on a regular basis, so what’s the best way to track your home’s value? We use an average of online estimates from Redfin, Zillow, and Homesnap.

We always assumed these estimates to be quite optimistic. However, we recently requested an estimate from a realtor and were delighted to find our own estimates to be slightly pessimistic! We’ll take it.

Liabilities (Debt)

Debts include any form of borrowed money. Below is a list of common, but not exhaustive forms of debt.

• Credit Card and Other Consumer Debt
• Mortgage
• Student Loans
• Car Loans
• Back Taxes and Other Debt

Credit Card Balance vs Credit Card Debt

We do not track any current credit card balances month-to-month. These balances are generally small (less than $2,000) and we know we are going to pay them off in full each and every month. However, if you are carrying months or years of high-interest consumer debt, you absolutely should be tracking this balance. The interest rates on credit card debt are some of the highest you can find, so it’s critical to have your eyes on these balances.

Mortgage

In our eyes, mortgages can be “good debt.” I know, this is sort of controversial. Mortgage debt is seen by many as acceptable debt, since in many scenarios, the value of a house will appreciate over time. Sure, student loans can also buy a product (an education) which can generate a good return on that investment. But does everyone go out and net a high-paying job with a college degree?

If you are using real estate as a vehicle to build wealth, carrying multiple mortgages is common and acceptable. We carry a single 30-year mortgage with a very low interest rate, at 3.5%. At the time of writing, we are starting to shift the majority of our savings (for the first time) to paying down this debt, with the idea of paying off the mortgage within the next year. Until now, we invested the vast majority of our savings to capture better long-term returns in the market. We have essentially reached our original 25x post-mortgage spending target, so it’s time to slay the mortgage.

Carefully Consider Home Ownership

One final note of clarification: buying a house is not an investment. Just because you bought for X and you plan to sell for X+Y, have you fully considered what has been paid in mortgage interest, maintenance and upkeep, escrow, and expected selling fees? What about the lost opportunity cost of not investing those funds elsewhere? I’m in full support of home ownership (unlike some FIRE bloggers), but do keep in the mind the nuanced cost of doing so.

PLEASE understand that taking on a mortgage you can’t afford will bury you. My friend, think long and hard about whether you can afford to buy a house. You must have ample room in your savings to pay the monthly mortgage + escrow payments and any unforeseen (and costly) expenses of home ownership.

(Related Post: Should I Buy A Home? Part 1 and Part 2)

Car Loan Debt

If you have car payments, it’s important to track the balance of your loan. If you’ve paid off your vehicle in full, then I’d stop there. The value of your car is technically an asset, but unless you plan to sell it soon you should otherwise disregard its value.

Calculating Net Worth

We keep a spreadsheet that tracks our balances from separate banks and organizations. Once each month, we log on to our various accounts and record the balances in our spreadsheet. We started this habit in October of 2015 and have tracked nearly every month since.

We are currently in the aggregation phase of wealth building, so it’s really quite exciting to bust out the spreadsheet! I’m serious, we get psyched for “spreadsheet day” each month, for the simple reason that you get to see yourself that much closer to your goal!

Of course, not every month is great news. From October 2018 through January 2019 we continued to plow money into our accounts only to see our net worth continue to stay flat or fall. The S&P 500 lost nearly 20% of its value from mid-October to Christmas Eve of 2018. It was rough watching our balances decrease as we invested more and more money into the market.

We’ve also watched our accounts come rebounding back and surge past our previous balances in the intervening months. That’s the game you play in the stock market. So it goes.

Net Worth: What is Included?

For us, it’s important to count liquid assets. Therefore we do not count our home equity towards our net worth. Why? Well, we live in our home for now. Unless we plan to move, that equity can’t be used for any sort of purchasing power.

Also, unless you plan to move somewhere substantially less expensive, most of that equity will just be spent on the next home. Home equity is devoured when people move into larger and more expensive houses. Finally, many folks underestimate the costs associated with selling a home, including realtor fees, closing fees, unexpected repairs, etc. We certainly track our total net worth with home equity, but we are not basing our decisions to potentially retire early on capital that is not readily available.

Don’t Track Small Assets

We also choose not to count the value of smaller assets, including personal items and car value. These assets are sunk costs. Yes, in the event of catastrophe (or if the Repo Man came knocking) we could sell these items to obtain cash, but we have no plans to do so.

As mentioned above, we also don’t tally monthly credit card bills. These balances are ephemeral and generally small in value compared to our net worth, so we let it be lost in the noise.

So let’s suppose you are more of the anal variety and want to capture every cent. I suggest you track your net worth each month after bills are paid. For us, we pay almost all bills and credit cards in the first week of each month. By tracking our net worth around the middle of each month, our current credit card and unpaid bills will be very low.

Watching Your Net Worth Grow

Over time, due to wonderful forces of compound interest, your net worth will grow even if your regular contributions do not change. As you can see in the chart below, there’s a lot of month-over-month variability. That’s the stock market for you. However, over time (the black best-fit line), the power of the compound interest on a larger principal balance starts doing the leg work for you! Rad.

Summary

Wow, this post is too long. Bottom line, start with tracking your spending. Here’s how. Meanwhile, start tallying up all of your assets and debts (as described in this post). Do both of these tasks at least once monthly. It’s difficult to see progress in weight loss without stepping on a scale, and it’s no easier to get your finances in the right direction without tracking them as well. A little (hopefully motivating) reminder:

Easy choices, hard life.

Hard choices, easy life.

Jerzy Gregorek