054 Net Worth Your Key to Financial Freedom

Hey there, real quick, before we jump into the episode, listen, if your earnings treadmill hasn't set you free yet, running faster won't either. Listen, hustle without principles just going to burn you out. So here's what I want for you. I want you to join me for my money machine experience live. It is three free trainings. Deep dive into how to escape the treadmill and build a money machine that actually works for you. All right, grab your spot here by going to moneymachinelive.com and I'll see you in the free training. If you aren't tracking this number, you're probably not building wealth and you're probably not going to get the financial freedom. So let's fix it. Welcome to this episode of the Affluent Entrepreneur show. I'll see you in the episode.

This is the affluent entrepreneur show for entrepreneurs that want to operate at a high level and achieve financial liberation. I'm your host, Mel Abraham, and I'll be sharing with you what it takes to create success beyond wealth so you can have a richer, more fulfilling lifestyle. In this show, you'll learn how business and money intersect so you can scale your business, scale your money, and scale your life while creating a deeper impact and living with complete freedom, because that's what it really means to be an affluent entrepreneur. Foreign.

So welcome to this episode of the Absolute Entrepreneur show. And so what is this number that if you're not tracking it, you're probably not building wealth, you're not on the road to financial freedom. So it's this concept called net worth. And you've probably heard it because there's a lot of people that talk about net worth. Build your net worth. Build your net worth. Here's the question, though. Is all net worth created equal? And what the heck is it? All right. Well, the answer to the first question is no, not all net worth is created equal. It is one of the metrics, though, that will drive you to financial freedom. And without it, you'll always be uncertain, you'll always be unclear as to where you are on your path to financial freedom and to get to the freedom that you actually deserve while you're trying to build legacy wealth. And so think about it this way. There's a popular commentator, you probably have heard of him, Dave Ramsey. Dave Ramsey. The reason Dave Ramsey does what he does is because he didn't understand.

The different kinds of net worth that there are, that they're not created equal. In fact, Dave Ramsey came out of bankruptcy. He. He declared bankruptcy in 1988. Okay. Dave went into real estate. He's a real estate guy. Okay. As much as a finance guy. He's a real estate guy. And so he was acquiring a lot of real estate. He was a millionaire in his 20s. But just like a lot of people were doing, they were acquiring real estate, and they were doing it with a lot of debt. Okay. So, so they were borrowing money to buy things and, and assuming that real estate would always go up. And so one of the challenges is that, yeah, long term, most of the time real estate goes up. But what happens when there's a dip? What happens when there's a market pullback? What happens.

When economic conditions start to affect. Listen, the house across the street, the prior house that we lived in before this house, the house across the street sold in 2007, just before the drop for $1.1 million. Okay. Then in 2008, we had the whole craziness that went on in 2008. The, the house, now my house was the exact same type of structure, model and everything, but it was completely remodeled, completely redone. New backyard and tropical backyard, all of these things. Yet, though, they sold their house for 1.1 million, I couldn't sell mine for even 800,000. Now, we never sold it. We weren't trying to sell it. But when we were looking at the market rates. Here's the challenge, though. What would have happened if, if the person. And they sold it at 1.1 million, the person bought it at 1.1 million. They bought it with debt. And so what they did is they went into it. I happen to know this because it went into foreclosure. They bought it for 1.1 million, they went into it for 10% down. So they put a hundred thousand dollars down on it. And so they're in this house with a million dollar debt. And then.

2008 hits, the prices drop, and the value of the house is now at 750,000. They bought it for $350,000 more. And the, the house is underwater because it's worth 750,000 and they have a million dollar debt on it. So they're $250,000 in the hole because of the market dynamics. It's, in a sense, what happened with Dave Ramsey. Now here's the challenge. They would have been fine if they could have made the mortgage payments, but they, they couldn't make the mortgage payments because during that time, we, we had higher unemployment. They lost their job. So all of a sudden, when you have a combination of highly leveraged net worth and a cash flow that comes to a screeching halt. It's not a good combination. So the house went into foreclosure and it sat there for a while until they finally sold it. Now we're talking 2008. The prices did not recover until.

2018. Ten years later, a decade for it to recover. So point being is that when we start to acquire assets and we start to build this concept of net worth, we, you can be what we call asset rich, but cash flow poor. Okay. And that's, that's pretty much what happened with Dave Ramsey. He had, he had a ton of assets, but all of a sudden cash flow was shrinking and was, was just going away. And so he was cash flow poor. Then he. When you're cash flow poor, you can't make the mortgage payments. And all of a sudden what do you do? You let it go into foreclosure or you renegotiate the debt. And this is what happened in 2008, happened in 1988 to Dave Ramsey. It put him in bankruptcy. Now he ended up paying back all the debt over time. But this is why Dave has this perspective about debt and all debt is the demon, the devil and everything else. And so, so the thing is though, when we're talking about financial freedom, we are talking about building a net worth, but a certain kind of net worth. And the only way we can do that is to track the net worth in a way that, that we know that we're moving closer towards, towards our outcome, towards financial freedom, towards that financial independence line. And so if we think about what I always talk about is that I think we all need to, whether we're employees or entrepreneurs, we all need to build a money machine. A money machine that is outside our effort, a money machine that's outside our business. A money machine that is outside of all the efforts that we do if we truly want to have freedom. Because freedom is going to be measured in the ability to control your time and the ability to have options and alternatives. And so one of the things that I do is we. I track my net worth and I'll talk about specifically the kind of net worth I track, how I do it and what goes into it. But let's just start off with the, the fundamentals and I'll jump to my iPad for those of you that are, that are watching on, on YouTube or on the video. If not, you can go there. If not, I'll make sure the graphics are in the show notes so you can get access to them. But what we're talking about, what is net Worth. And, and the idea of net worth is really about a couple of concepts. It is, it is literally about.

What you own. These are what we call assets, okay? Assets. What do you own? And we'll talk a little bit about what those assets are and what are assets and what aren't assets. And then it's about.

It'S about what you owe, okay, what we call liabilities. Now, hopefully, what happens. What happens is that your assets are greater than your liabilities, okay? Your assets, the things you own, have a higher value than how much you owe. Okay, let's go back to that, that house example, okay? When they bought the asset, it was 1.1 million. They put debt against it of a million, so that what they owed was a million dollars. Okay? So they have an asset for 1.1 million. They have debt on it, a mortgage on it of a million. They have a net worth of 100,000. Okay? That's the, that's the way it goes, is that, that the idea of net worth is simply what do you own and what do you owe and what's the difference? And hopefully what we own is greater than what we owe. If not, we are what we call illiquid or insolvent. And this is what leads to bankruptcies when we over encumber ourselves or we take on too much debt or the asset values of what we have decline at such a level that we now owe more on them than they're worth. And so this is the, this is what net worth is. We want to manage the things that we own, the things that we own, and we want to manage.

The things that we owe, because that's the key. And then we want to track all of it. So if, if we look at that, then we track it. Now, I track mine on a monthly basis. Some will track it on a quarterly basis, some will track it on an annual basis. I think when you start out, you start out with just tracking it on a, on a quarterly or monthly basis, just so you get into the habit of checking the pulse. Now why do I want to do that? Here's, here's what I know is that when you are tracking your net worth, it. It does a couple of things for you when you track your net worth. One, you have the details of everything you own and owe on a page. Okay? I have a snapshot that I know everything.

On a page. And mind you, this is something that actually my wife and I will do together once a year. We'll do it together. We'll look at it where we are, where We've been what we've grown. And then we compare that to what we need to be at for our financial independence, financial freedom, or what our vision is, our affluence vision is to make that happen. The other thing that you start to do with this is it'll set milestones.

When you're setting your goals at the beginning of the year, at the end of the year when you're setting that, we can set a financial goal saying I want to increase my net worth X, you know, X percent or X dollars. You can use it to establish milestones along the way and then use it, number three, to use it to understand what your daily decisions are and how they're going to affect your net worth. Is this something that's going to increase my net worth or is it going to decrease my net worth? And then over time, Now I've got.

15, 20 years of my net worth that I've tracked. The other, the last piece of this is you can actually see the trend.

Of your net worth growth. And I will tell you, the funny thing is that you're going to see that your net worth will grow slowly at the beginning and then accelerate as you, as you go. And it's, it's what I call money. Momentum.

Is your, your money will start to gain momentum, but you don't see it until you start to track it. And so quite frankly, this is one of the most important numbers that you want to track. What do you own and what do you owe? Well, let's just talk about.

What is truly an asset, because I think this, this becomes really important for us to, to, to look at because if we don't understand what is an asset, we may think we have assets and we don't. Okay, I will tell you and, and my wife hates when I say this, but I'm going to say it again. This home that we live in is a beautiful home and it's worth millions of dollars. Okay?

It's on the beach, we love it here. It's not an asset. And in fact, it's one of the worst financial investing decisions I could have made if it was just based on the numbers. So let me say that again. One of the worst decisions I could have made if it was just based on the number, the numbers. Because let's look at what, what happens. I'm going to put money into something that's going to sit there and the only way I can get now this, the value of this house has gone up. The only way I'm ever going to see that Value is to sell the house. Well, we're not going to sell the house. We're going to live in it. This wasn't going to make sense financially, but it made sense for our lifestyle and the quality of life that we want. The reason I bought this house, people say, well, why would you have bought the house? And it's just one thing.

And that was because I saw how Stephanie felt when she stood in the kitchen and in the big room overlooking the beach.

I just wanted to give her that gift. That's it. So I made a qualitative decision.

That if I was just looking at the numbers, maybe doesn't make a lot of sense, but it made us, made sense to give us the richness in life. Now we were in a position to do that just the same. So what is an asset? An asset, in our opinion, in the affluence blueprint, what I teach my, my, my members and the people that I work with. An asset is something that can provide you cash flow.

Or increase your net worth over time. So if this house was rented and it was bringing cash flow in, now it's an asset. But because I'm living in it, it's not an asset that lends itself to giving us financial freedom. Because remember, the idea here is this, is that I want each of you to get in there and build a money machine. Okay? So you're going to build a money machine.

Now.

I don't want you to build a money pit. I want you to build a money machine. The money machine is like an atm. The only way that the money machine works is if it has the ability to give you cash flow, because it's the money machine that's going to allow you to have freedom.

And choice.

On, on whether you want to work. Okay? When I got diagnosed with the cancer, we had a money machine. We had a bunch of assets that could produce cash flow and allow us to live our lifestyle. Now, that cash flow we weren't using because my businesses were working and her, she was working and she's doing. And so we're living off of that while we're building the money machine. Bigger, bigger, bigger and bigger. But when I decided to stop the business so I could focus on healing, all we did was flip the switch and say, hey, machine. Instead of it growing bigger and bigger and bigger, let's grow at a slower pace and give us the cash so we can live. That's the beauty behind creating a money machine. And your money machine is going to be made up of assets that can produce cash flow. Over time. And those assets are going to be things like ETFs, you know, exchange traded funds. It's a portfolio. Index funds, single stocks. Okay. Real estate, intellectual property. Okay. Airbnb properties, commercial properties, real estate, investment trusts, Basically any asset. I want to create an accumulation of assets that's going to produce cash flow over a period of time, and that's the net worth. That is what we call investable net worth. Okay? So. And I'm going to walk you through an example here in a second so you'll. You'll understand what I'm getting at. There's going to be total net worth, and then there's going to be investable net worth. The number that we want is the investable net worth, because the investable net worth is the net worth that's going to produce the cash flow that gives you the financial freedom over time. Let's run through some numbers here for a moment so you can start to understand what I'm talking about here. Let's just assume that I'm doing my net worth, and I have. I have cash.

I have stocks.

I have ETFs.

And I have real estate. Okay? I have my home.

I have cars, I have clothes, all of these things. You think, oh, man, I have jewelry.

And you think those are all assets. Well, let's just look at some of them. And remember, my definition of an asset is something that produces cash flow that I can live off of over time. That's how we get our time back. Well, cash, this is probably an asset, but we probably are using it or going to keep it there for emergency. So I'm going to. I'm going to allow that to sit. Okay. Stocks, I have a portfolio that's going to be earning, it's going to be growing that I can sell or I can take dividends from. That's an asset. ETFs. That's an asset.

Because. Same thing, okay? I'm building that portfolio. Investments. That's going to produce income over time. Okay? Real estate. So it could be a commercial property, it could be an apartment building, it could be an airbnb, it could be a single family residence, but that is rented. It's producing cash flow that is going to allow me to live off of my home, though. Okay. My home isn't an asset. We just talked about my cars. Eh, not typically an asset. They're a depreciating asset most of the time in today's economy, it's kind of. It's kind of weird. They're going up, but typically Cars, unless they're collectibles, go down. Clothes. Nope. It's not producing cash flow. Jewelry. Likely not. So the assets that you have here is going to be the real estate, the ETFs, the stocks and the cash. So let's just put some numbers to it. Let's assume for argument's sake that I had $10,000 in cash.

I had a hundred thousand dollars. I'll make them round numbers so I can do this on the fly with you. A hundred thousand dollars in stocks, $50,000 in in ETFs. The real estate is $250,000 in real estate. Okay? The home is.

Call the home. Another $200,000.

Cars, $20,000. Clothes. We're not going to worry about clothes and jewelry. Okay? So if I look at this, the total net worth is going to be the. All of this. So 10,000 plus 100,000 is 110 plus another 50,000. So it's 160. 250 for the real estate is 210,000. 410 plus another 200, that's 610. And 20,000 for the cars, that is 630,000. If I did it right, this is probably not a safe thing for me to do it on the fly, but 630,000. But this is total net worth.

Okay? It's not investable net worth because not all of it's going to work for you. Remember, I said that the two things that are on here that we're not going to think about is the home of 200,000 and the car of 20,000. So that means there's $220,000, which are part of the net worth, but not part of investable net worth. And I get. And I take that out. So really, my investable net worth is $510,000 in this example, when you see it this way. And so the point is, is that this is my money machine. The $510,000 is the money machine. Okay? So what we want to do is I want to track total net worth, but I also want to track investable net worth. And that investable net worth are those assets that are going to create cash flow in the long run for you that you can live off of because they become part of the money machine. So the key then is figuring out. And we do this, we do this by creating an affluence vision. And a cash resource plan is figuring out how big of a money machine you want to create. And now when you're tracking your net worth and your investable net Worth, you know how far away from that number you are. You know, if it's a million dollars you need in investable net worth, let's just for argument's sake, say it's a million dollars and you're going to earn 5% on that million. That gives you $50,000 a year to live off of. Okay? If you want a hundred thousand, you want to make it $2 million. It, it's, it just becomes a mathematics game. But now you can track it. And I tracked my net worth from the very beginning. I tracked it going up, I tracked it going down when I lost it in the Ponzi scheme and attracted coming back up. And we track it every single month. Basically at the first of the month, I go in, I update the numbers, I look at it, I see where we're at, I see what the changes are, I see if they, I have to make any changes in any of my decisions and then we move forward. It doesn't take me but a half an hour a month to look at the net worth. However, what it will give you on your trajectory to a new financial destiny is priceless. So here's what I want you to do, okay? And I know that some of this may be maybe challenging because it's math and we're creators and that type of thing. Right now what I'd love for you to do is to make a list to do an inventory of all your assets, go through and say, how much do we have in the checking account? How much do I have in my savings account? How much do I have in my 401ks, my IRAs, what's our real estate that is producing income? What's the real estate that isn't producing income? Do we have anything in stocks, bonds, what do we owe on the other side of it? In other words, do I have credit card debt? Do I have student loan debt? Do I have car debt? Do I have mortgages? Do I owe personal friends money, you know, or family members money? Figure out what you own and what you owe and put it down on a spreadsheet, on a worksheet, on something to calculate your net worth. So you, you're going to calculate your net worth by adding up everything you own, subtracting out everything you owe, and now you have your total net worth number. Okay? Then I want you to look at the things you own and I want you to look at them and say, which one of these elements are going to produce cash flow for me in the future? It's going to be your 401 or something you can live on in the future. 401k, your IRAs, your ETFs, your stocks, your index funds, rental real estate, income producing real estate, all those things, your home, isn't it. Your car, isn't it. Your clothing, isn't it, you know, you know. But I still want you to track it because those are things that you could sell if we needed cash, but they're not ongoing because if I sell the, if I sell my home, I gotta find a place to live. So I don't count it. So I want, I want to look at all the things that are income producing for you now or in the future.

And add those up, subtract out the same debt and that's your investable net worth. Okay? When you track this on a monthly basis, you will be checking the pulse on your financial destiny. And this is one of the key metrics that will help you drive your wealth drive to financial freedom and make sure you're on track. Okay? Okay. I hope that this helps you. Here's a couple things that I love for you to do. I go deeper on this idea of assets and why and how the income flows in episode nine of my show. So I'm going to link that up here. Check it out. It's called why assets are vital to your financial freedom. Also, if you're in the journey, if you're in the journey to building wealth and you're trying to figure out what do I do with my cash, how do I put it out there? Then I want you to go to episode 24. I'll hook that up over here too. It's called what to do with your cash. And start with those two episodes to start helping you out. And when you, if you have questions, I know people are posting questions on my YouTube videos, sending me DMs, send me your questions. Some of these videos are coming out of the questions that you're asking. And so help, let me help you out. Let me keep you on this journey together. So keep in touch with me, reach out to me, let me know I can support you in this journey. But for now, focus on your net worth. Let's get that number figured out. What do you own? What do you owe? What is investable net worth? What is total net worth for you? Where do you want to go? All right. And let's track it on a monthly basis. And I promise you, as you continue this, you'll see that that which is measured can be managed. And when we manage it, our financial destiny will change. All right? Until we get a chance to see each other or talk to each other in another episode of the affluent Entrepreneur show. Always, always strive to live a life that outlives you. Cheers.

Thank you for listening to the affluent entrepreneurship with me, your host, Mel Abraham. If you want to achieve financial liberation to create an affluent lifestyle, join me in the Affluent entrepreneur Facebook group now by going to melabraham.com group and I'll see you there.

And that's it for this episode of Building your money Machine, where we help you learn how to master your money, eliminate financial stress, and live a life of choice. If you found this valuable or helpful to you, here's what I'd love for you to do. If you do me a favor, go to Apple, Apple Podcast, or wherever you're listening to this podcast and rate and review the show. It helps us tremendously to keep us at the top of the list so we can continue to get this information and this message out to people. Because I truly believe that financial freedom is your birthright, and I want to help each and every one of you claim it. Thanks so much.