Your Net Worth is Lying to You. Here’s Why…

You've been doing the work, saving, investing, watching the numbers go up, and part of you feels really good about that. But there's this other feeling that won't go away. This quiet voice that says, why don't you feel freer, better? Why does it still feel like you have pressure? Here's what I want you to consider. Your net worth number might be lying to you. Not because the math is wrong, but because the— you're answering the wrong question entirely. See, it's telling you whether you're solvent. It's never designed to tell you whether you're free. And those things are two completely different things. I'm Mel Abraham, and this is Building Your Money Machine, where we help you master your money, eliminate financial stress so you can live a life of choice. Because earning more doesn't make you free. And after 30+ years as a CPA, an entrepreneur, a money mentor, and someone who's walked this path, to financial freedom, from nothing to something, broke it and had to rebuild it. I've seen what works, and it's not about bigger numbers. It's about bigger and better choices. Let's dial in how to really use the net worth. All right, let's do this. All right, so here's what no one in the financial world wants to say out loud. Most people, they're measuring their wealth with the wrong ruler. Let me show you what I mean. The traditional net worth formula, it's, it's simple. Assets minus liabilities equals net worth. You own a house, say, for $500,000. You owe $400,000 on the mortgage. That's $100,000 in net worth. Then you add in your car, your savings account, your 401, your furniture, your clothes, whatever you have, then subtract out what you owe. Credit card bills, those kinds of things, student loans. And that's the number. Now, here's the thing. That formula isn't wrong. It's just incomplete for what we're trying to do here. That formula was built by accountants. It answers a solvency question. And I say that as a CPA with 30-plus years of practice. But it tells you whether you have more than you owe. And it's the foundation. I get it. But it keeps you out of financial ruin, maybe, but it doesn't tell you whether you're actually free. It tells you that you're not drowning. There's a meaningful difference between not drowning though and actually swimming somewhere with purpose. Here's, here's where it gets interesting. When I talk about wealth, I make the distinction that most people have never heard. There's a difference between being rich and being wealthy. Rich is about how you experience and feel about life, the connections, the experiences, and all of this stuff. It's not about the dollar amount. Someone living simply and joyfully in their values can be living richly. Someone making $500,000 a year and not can be miserable. See, wealthy is about whether there's money that will be able to pay for things to sustain your life without constant effort. And that's just a number that tells you whether you got the number right. It's not really living a rich life and it's not your net worth. It's something else. When we talk about net worth and say, what's the number that allows me to live the rich life? It's something that I call investable net worth. And these aren't the same number. And for most people, they're not even close. All right, here's what I mean. Most people add up everything they own. Like I said, the har— the house, the cars, the jewelry, the collectibles, maybe the boat. I don't know. And, and when that adds up to $1 million, they feel like, wow, they arrived somewhere. But I've sat across from people in my practice They come in feeling confident and they've got this million-dollar net worth or millions of dollars in net worth and they've done the math themselves. And then we dig into it together and we start separating out what they own into two buckets. One bucket is what can generate income to pay for your lifestyle. And the other bucket is what can't. And when we're done, they're staring at two different numbers. Because the house that they live in is not a cash-flowing asset. Now, I get it. You need a place to live. That's not what I'm saying. It is an asset, but it isn't an asset that's part of the money machine that allows you to be free. It's where you sleep at night. You know, it's a lifestyle and a use asset. So I'm not discounting. I'm just saying that it doesn't belong in the calculation of can it support you. And so That's the thing. Then you start to look at the money in the bank account and that, that kind of thing. And so same thing with a car, same thing with the clothing, the shoes, the collectibles. Those might bring you joy and they're totally fine to have. They're just not gonna be part of what I call the money machine. See, your car is not your retirement plan unless you, you're planning to rent it out on Turo, which in that case, fine, we can talk. But here's the data point that stops people cold every single time. Time I share it. When you look at truly wealthy households, the ones who actually have financial freedom, their primary residence typically makes up about 20% or less of their total net worth. But for most other households, it's closer to 50% or even more than that. And so you got to think about what that means. If you have a million dollars in net worth and half of it is tied up in the house that you're living in, then your actual net worth is only $500,000. Not $1 million, $500,000. And if you have a mortgage on that house, that debt still has to be serviced and that eats further into what's available. The composition of your net worth, not just the total, is what determines whether you're— you can retire, whether you're free, whether you can choose to stop working, whether you actually have a money machine or just a nice looking balance sheet. See, your net worth didn't grow because you built a better wealth system. It grew because your house value maybe went up. And those things are not the same. And the composition, the way it's built, that didn't change, which means that the freedom they thought they were building towards didn't change either. So now you know what the problem is. The traditional net worth formula is answering the wrong question. Coming up though, I'm going to introduce you into the number that actually tells you whether— where you stand on the path to financial freedom. And I promise, once you see it, you'll never look at your finances the same way again. All right? Because the number that actually matters is that number that I said earlier, investable net worth. Here's the simple definition. It is the portion of your net worth that can generate the income to pay for your lifestyle without you having to sell your assets at the wrong time. That's it. That's the whole thing. What do you own that can actually work for you? Remember, the subtitle of my book is, is How to Get Your Money to Work Harder Than You Did. Okay? That's the key. And the calculation looks like this. You take your total assets, But instead of counting everything, you only count the ones that belong in your money machine. Stocks, bonds, index funds, ETFs, dividend-producing investments, income-producing real estate, retirement accounts, brokerage accounts, business equity interests that are generating cash flow. Then you subtract out your total liabilities, everything you owe to everyone. That's student loans, that's mortgages, that's credit card balances, all of it. And when you subtract that out, that's your net investment net worth. That is the size of your money machine right now. Everything else, the house you live in, the cars, the collectibles, the shoes, those are lifestyle assets. They do have value. They just aren't part of the machine. Now, I know what some of you might be thinking. But Mel, my house is an asset. It appreciates. I'm building equity in it. And you are. You know, I'm not, I'm not taking that away from you. But here's the question. Can you live off that equity without selling the house or taking on more debt? Because if the answer is no, and for most people it is, then it's not feeding your financial freedom. It's housing your family, which is totally wonderful. It's just a different category. See, your house loves you. It shelters you. It warms you. It gives the dog a backyard. It's not, however, gonna make your car payment when you retire. Let me make this real with a scenario though, because imagine someone comes in with what looks like a solid financial picture, total net worth of $1 million, and it feels good. We dig in. Residence worth $600,000. They owe $350,000 on a mortgage. The rest of their net worth is split between the 401, a small brokerage account, and some savings. This is a real client. Their total net worth is $1 million. But when we calculate the investable net worth, we strip out the house. Now we're working with about $400,000 in investable assets minus the remaining liabilities. So their actual money machine is maybe $300,000 to $350,000. That's a real number. And what we could generate from it if we use a 4% withdrawal rate, the rough guideline for a sustainable retirement is about $12,000 to $14,000 a year in income. Now, they thought they had a million-dollar machine, but what they actually have is a machine that generates maybe $1,100 a month. That's not retirement. That's a supplement. And it's not criticism of that person. It's just a reflection of what the traditional conversation around net worth has been for decades and what it's been missing. So here's why this matters so urgently. In 2008, we watched people play out a scale. People had real estate, they had what looked like positive net worth, but it was debt in comfort. Real estate with no liquidity underneath it. And when the values dropped and the jobs disappeared and they couldn't pay the mortgages and people couldn't pay the rents, they couldn't sell the properties because they were worth less than what they owed on it. What had looked like wealth on paper turned into a financial crisis in real life. See, a positive net worth on paper, but they were bankrupt in real life because the composition was wrong. And the liquidity wasn't there. The people who made it through 2008 with their wealth intact weren't necessarily wealthier on paper. They had the right structure. They had liquidity. Their investable net worth was real. That's the game we're playing, not just growing a number, building a machine that can actually sustain your life. See, here, here's the thing, and something I think we need to be aware of, and something I want you to do. I want you to actually calculate your investable net worth, and One of the first ways to do it is to look at what your freedom number is. And if you're not sure what that is, that's, that's the number you need to be financially free to support your lifestyle. And I have a freedom number calculator. It makes it really easy for you. It's totally free. Walks you through exactly what to count and what to put in there. And you can play with the information. Go to melabraham.com/number and download it. Play around with it. At least it'll give you a trajectory and you'll know what you're dealing with. And now you're dealing with the real number of investable net worth. Now, here's the thing. There are 3 things that determine if your investable net worth actually works. Because think about this, you've done the math, you've stripped out the lifestyle assets, and you know now your real investable net worth. Now what? Two people can have the exact same investable net worth and have completely different outcomes. One person can be living comfortably off their portfolio. The other one could be white-knuckling it through every single market correction. See, the difference isn't the size of the number, because this is the other thing that gets missed. We think it's just the absolute size of the number that matters. It's not how— it's not the size of the number, it's also how the number is built. And there are 3 things I want you to think about as you're building your net worth, your investable net worth. And the first thing is this: liquidity. Not all investable assets are equally accessible. And when you need money, when life happens, you need to be able to get to it without blowing up your whole strategy. It's one of the reasons the Wealth Priority Letter is built the way it is. It's a framework for what to do with every single dollar in a specific order to optimize it and to give you an unshakable foundation. It's not just about the returns. It's about liquidity. You need a peace of mind fund. You need something to carry you in the downturn so you're not liquidating Assets at a loss or at a, at a discount, if you will. And so this is the thing that we need to have. We want money set aside in a high yield savings account. Now you can do 3 to 6 months in an emergency fund. That's great. I push my clients and my students to go to 9 to 18 months, call it 12 months in, in general, high yield savings account, fully liquid, fully insured, not tied up, not invested, just there available. The job of this money is not to make you rich. The job of this money is to keep you sane and keep you rich. It's to protect what you're creating. And that's one of the first things we need to do is make sure that we have that piece of it in our investable net worth to take care of it, because it protects the rest of it. Because when the market drops 30%, the person who has the peace of mind fund just watches it happen. The person who doesn't has to sell into the drop, and now they've turned a temporary decline into a permanent loss. Congratulations. Okay, the reason this matters for your investment net worth is without liquidity, the foundation is completely shaky. You need to be able to let your investments do their work without being forced to interrupt them, without being forced to sell them. That lesson was driven home in 2008 when When the values dropped. Liquidity is what turns your investable net worth from a number into a machine that actually functions. Now, the second thing is this, the risk tolerance relative to your timeline. Here's where, where I won't give you a one-size-fits-all answer because there isn't one. And anyone who says, here's your formula without knowing your age, your stage, your circumstances, and your psychology, is selling you something. What I can tell you is this, and it's a principle: the amount of risk you take on has to match the amount of time you have before you need the money, combined with the amount of psychological volatility you can actually sustain. I call it your risk triad, your risk profile, because here's what happens. People build portfolios and they can't emotionally hold themselves together during a correction. The market drops 25% and they panic and they sell. I did it, it cost me millions. And they lock in losses and then they watch the market recover and it recovers without them. This happened during the COVID drop. A lot of people jumped out because they didn't know what the bottom was, and then it recovered pretty quickly and left them all behind. See, when emotions go up, financial intellect goes down every single time. And if your investable net worth is sitting in a portfolio that keeps you up at night, that's not a wealth-building strategy. That's a stress-generating strategy with a side of maybe making some money. The right composition is the one where you can stay the course when things are uncomfortable because they will get uncomfortable. That's not a possibility. That's a guarantee. You see, investing without ever experiencing a downturn is like saying that you've been driving for 20 years, but you've never hit traffic. Either you're very lucky or you're not leaving the driveway, quite frankly, because build a portfolio that you can hold. That's how you let it compound and how you let the growth compound and how you let it grow for you. So that's the second thing. And then the third thing is this: the tax location. This one is where it gets almost no attention in most conversations, and it can make a massive difference in what you actually keep. So your investable net worth isn't just about the assets you have. It's about where those assets live. And there are literally 3 buckets. The first bucket is the taxable accounts. This is your brokerage accounts, your Schwab, your Fidelity, your Vanguard, you know, those kinds of accounts. You can access the money anytime. If you access it and you sell, you'll probably pay capital gains tax. If you hold it more than a year, it's long-term capital gains tax when you take it out. But it's available, it's flexible, it's liquid. The second type of account is a tax-deferred account. Your traditional 401, your traditional IRA, those retirement accounts that the money goes into, you get a tax deduction for it, and it goes in and then grows tax-deferred. But when you pull it out, you will pay tax on it. And you generally can't touch it until you're after age 59 and a half. So there is an age restriction on it. If you take it out any earlier, you're going to pay the tax and you're going to pay penalties on it. So that's the second bucket. And then the third bucket is the tax-free accounts, your Roth IRA or your Roth 401. Those you can contribute to after-tax dollars so you don't take a deduction, but they grow totally tax-free. And when you take the money out down the road, you never, ever, ever pay tax on it. Now again, you have age restrictions on it. Although you can get to the contributions, you have age restrictions on it. So if you take it out early, you're going to get hit with a penalty. So that's the thing. Now, where your money lives determines how much of it you're actually going to keep. See, two people with the same investable net worth can end up with very different amounts of spendable income depending on how it's positioned. I look at mine, I have a lot of mine in tax-deferred accounts because when Roth came out, just a statement of how old I am, it wasn't available to me. I didn't qualify for it because of my income levels. And, and so most of my, my retirement accounts, when we draw out on it, it's going to get taxed. And there's some things with those tax-deferred accounts that I don't want to get into here, like required minimum distributions, all kinds of things. But the point is, is that the location of your assets has an impact. So let's Let's look at the big picture again. The 3 things that determine your net worth, or I want you to consider, is liquidity, your risk profile or risk tolerance, and the asset location. Those are the 3 things that determine whether the investable net worth actually functions as a money machine or just sits there looking impressive. And you can't just ask how big the number is. You have to ask, is my number built to work. That's the thing. So let's bring this home. Your traditional net worth is not a lie in the mathematical sense. The formula is correct. It's just answering the wrong question for someone who wants to live a free life. The question that matters is not, do I own more than I owe? The question is, can what I own generate enough income to pay for my life without me selling it piece by piece Or working until I drop? That question has a different answer. And that answer starts with your investable net worth. Strip out the house you're living in, strip out the cars, the collectibles, the clothes, and everything else that doesn't guarantee a cash flow. Look at what's left. Build that number with the right liquidity underneath it, the right amount of risk for where you are in your life, and positioned in the right tax buckets. And that is your money machine. And that's the thing that can give you freedom. See, I've sat with people who've done this and they've done this calculation and then they felt deflated at first. Their number went from $1 million to $400,000 in about 5 minutes. I was not their friend. And, and I understand that feeling and I do, but here's what I always say, at least Now, you know, because here's the thing. If your investable net worth is positive at all, even if it's smaller than you thought, you have the capacity to build this. You just needed the right target. You needed to be solving the right equation. The math will always math out, but only if you're working with the right math. You don't need to panic. You don't need to overhaul everything tomorrow. You need to know the real number. Understand the gap and start building towards it with intention. It's not complicated, it's just honest. Because earning more doesn't make you free, but that money machine does. And you know what a money machine actually looks like now, under the hood. Go calculate your investable net worth, compare it to your total net worth, see the gap. Because once you see it, you can't unsee it. And once you can't unsee it, you start to build towards it. If this helped you, if it helped you see your financial picture differently, do me a favor. Hit the thumbs up, leave a comment, DM me, send me a message. I'd love to hear from you. I'd love to carry this conversation further. I want to know what your reaction is when you did the math. Trust me, I read every single one of them. And if you haven't subscribed yet, do it now. The channel is built for people who, who are done trading time for money. And want to build something that works without them. All right. I hope that you found this valuable, and I hope that this gives you a new perspective on this concept called net worth and how it can truly work to your benefit. All right. Till I get a chance to see you on the road as I'm out there speaking or on your path to your financial freedom, as I always say, always, always strive to live a life that outlives you. See you in the next one. Cheers for now. 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'd do me a favor, go to Apple, Apple Podcasts, 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 to 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.