#62: Why You Should Track Your Net Worth

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Hey everyone, hope you've had a great week. This week we're going to talk about a topic I love talking about. It's about tracking your net worth. Now, I've had several discussions with my colleagues even over the past week, month regarding personal finances and retirement. I guess it tends to come up. Some of them know I have a blog, a podcast that talks about a lot of these things. And so we tend to talk about retirement numbers, passive income. But what happens is that throughout these conversations, it quickly becomes evident and clear that most people have no idea what they actually need to retire or when they've actually won the game. Or, you know, do they have enough cash flow, you know, where they at, can they actually cut back? These kind of things are something that most people don't have quite a great understanding of, and it's because they don't track it. That's it simply. And I think one of those main things that track is your net worth, right, in addition to your passive cash flow. I mean, it's kind of like knowing your net worth is kind of knowing your basic vitals, right? Like your blood pressure, heart rate, like how do you know how healthy you are or how changes have occurred or how things are trending if you're not tracking it over time. And so I think it's important to do so. And we're going to talk about it today on today's podcast episode. Now let's back up a little bit. How do you calculate your net worth? Like, what does it mean, your net worth? In essence, it is your assets minus your liabilities. That's it. You take all of your assets, bundle them together, and you subtracted your liabilities, and what are you left with? So the question is, like, what's an asset and what is liability? Now, I've written several blogs on this. I've talked a lot about this. I think I've even had a podcast episode on this, if I'm not mistaken. But an asset is something of value that in essence could be turned to cash, right? Or provides cash flow for you. So if you want to figure out your total asset amount, like what's in that bucket, you want to add up the cash that you have in the bank, you want to add up the Value of some items, like, you know, your house, your rental properties, stocks and bonds, the value of your businesses and other investments. Now, just as a side note, real quick, there's always a debate whether one should include their primary home in their net worth. Now, when I calculate my net worth, I do put it in there. Now, I put it in because I like to know how much my home is, how, and if I needed to, I could sell it. The reality, though, is that I consider my primary home a liability when it comes to cash flow situations. What do I mean by that? Yeah, it doesn't produce cash flow for me. And it's hard. I know people say it is hard to sell your primary home, and that's why it should not be counted as an asset. In fact, when you're looking at your qualification for something called an accredited investor, or whether you're an accredited investor or not, and we've talked a lot about this, they actually make you exclude your primary home. And that makes sense because you can't just go ahead and sell it. I mean, you could, and I know you could rent out for a while, but the reality is that's a very, very difficult thing to do. But for your basic net worth calculation, I'd say most people put it in there initially. Okay, so your primary home, rental properties, this sort of thing, if you really want to get down to the details, you probably want to add things like your jewelry, furniture, maybe the cost of your. Well, the value of your current vehicles, of course, minus whatever you owe on them and that sort of thing to understand your full net worth. Now, if anybody has gone through a recent home loan process, mortgage, you know that they're asking for all these things and you've probably gone through this and actually totaled it up. And it's actually really interesting. Now, what's a liability? Now you got to subtract those things out to gather your net worth. Now, these are things that you owe, right? Or that take money out of your pocket. For example, debt on student loans, your mortgage, cars, rental properties, credit card debt. Now, I know that most all of us start our lives as attendings with a negative net worth. That just makes sense. We haven't made a lot up to that point. We've been training all those years. Not like we have a lot to our name and we usually have some student loan debt that we come out with, some car debt, whatever it might be. And so it takes a little while for us to actually get to the point of a zero or net neutral net worth. But I think it's a great time to start tracking it even when we are at a negative net worth, so we can see how things are growing over time. Now, I know the question becomes why does it matter? Why does it matter? If we track our net worth, how does that change things? Now, here are some reasons why I think it's important to track it. Number one, it tells you how financially healthy you are. Now, a positive net worth means that your assets outweigh your liabilities. A growing net worth means that you're doing a good job of building assets and minimizing liabilities. When you read certain books like Rich Dad, Poor dad, basically the goal should be to increase your assets and decrease your liabilities over time, right? And that's how you know that oftentimes you're going to get enough cash flow to live off of is that you're increasing your assets and things that provide cash flow into your pocket. Now, if something's like decreasing your net worth is decreasing or you're still at a negative over time, you know you're losing the battle to debt, right? And maybe you need to make some changes. And that's why it's important to find out how financially healthy you are. Along with that, it does help you keep an eye on your debt. So every time you look at your net worth, you're going to look at the amount of debt you carry. Now, things like student loan debt, they're a necessary evil to some degree. However, in the liability column, things like consumer debt like credit card car loan debt, we all know those things don't help you. Now, I don't think that all debt is bad. I'm not like Dave Ramsey and I am against credit card debt and I am against rental property and mortgages and things like that. I think that debt debt is just a tool. When used properly, it can really help you. It can help you leverage your investments and leverage your net worth and grow your passive income. I just think it's important for you to understand whether that debt is helping you or serving you or you're using it or it ends up using you. And lastly, I think it's important to track your net worth because it helps you make smarter financial decisions. Just so you know, when you're actually tracking these things, when you're looking at how you're progressing monthly, it can be really motivating. It can help you maintain focus on what areas need improving. Just so you know, things don't always move in a straight line. Your network doesn't always go in a linear fashion. Things go down Things go up and that sort of thing. But you want to make sure things are trending in the right direction. But again, ultimately it will help you put financial and important financial decisions and into perspective. Right? You want to make sure that you're making decisions that will build your asset column and decisions that will decrease your liability column. And actually when you're, you know, faced with decision, you know whether you should make a good financial decision, like put it up against that. Is it going to increase your net worth at the end of the day or is it going to decrease your net worth? And maybe that's how one way you can make a smarter decision. Now, I know what you're asking. How do you track your net worth? I mean, there are so many different ways to do it. You're going to do it manually or you're going to find some online platform to do it automatically for you. So if you can do it manually, that's not a bad way to do it too, especially at the very beginning. So you can understand where all of your assets are and your liabilities. So you can use something like Google Doc, Google Sheets or an Excel, but either way you just have to put like an asset column and a liability column and then just add them all up at the end of the day on both sides and assets minus, minus liabilities and see what your net worth is. Now it's kind of a good exercise to do not only with you, but, but your spouse or partner, because I think it helps you put your whole financial picture into perspective. And if you haven't done that yet, I would highly recommend you do that at least once in your life so you can see where you're at. Honestly, it's pretty straightforward. You know, you spend an hour, put your computer in front of you, tally some things up, and you're there. Now, I know that it's hard, it may be hardest to do that on an ongoing basis. And how often should you do that? I know people who track their net worth monthly. I know people track their net worth quarterly, probably once you're past six months. It's probably too long to go between tracking, but some people like to use online platforms. Now there are online platforms like Personal Capital. I know that people use Mint. Whatever you want to do, just stick to one. Personally, I use Personal Capital because I tend to find it's pretty easy. And so I'm able to log into there and see my net worth. Now, it's not perfect because it doesn't include everything that I wanted to include, but it gives me a basic idea again, so I know where I'm trending. It's nice to have some fancy charts in there as well, and it's kind of fun to look at. So I know that there's a lot of people out there that want to be smarter with their finances. You know, they want to have that life of financial freedom. They're reading tons of books and I know they're looking tons of stuff online. But I would also recommend if you haven't done so, think about tracking your net worth. You're going to find out a lot about yourself, your spending, where are you putting your money in terms of your investments? And you're going to find out where you're at, right? At least a baseline to know how you're tracking and moving forward on this journey to financial independence and financial freedom. So let me know how it goes. I'd love to hear from you. If there's some other way that you're tracking that I don't know about, please let me know as well. But either way, have a great week. Take care.

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