What is your net worth?

You probably know what is in your checkbook. Most people I run into have some idea how much money they have. I know a handful of people that don’t, but they are few and far between. Face it, it’s natural to track it, since we need to know if there is enough to use our debit card.

But the balance of your checkbook isn’t an important metric for building retirement wealth. To see if you are succeeding or failing on that front, you need to be able to calculate your net worth.

  1. First, biggest step is to quickly and easily tabulate all your bank accounts (do you have more than one?). 
  2. Next, add up your big assets. This includes things like the value of your home. Other real estate. Some people throw in cars. Me? I don’t count cars, because the valuation is always dropping, it’s never worth that much the day you sell it, and in the end, WHEN I plan to sell it, the value has dropped too low to contribute much to my net worth. 
  3. Finally, add up all your debts and liabilities. Basically, to whom do you owe money? Numero uno should be the mortgage on your home. Throw in credit card debt. Auto loans. Me? I have a gigantic liability that I’m going to have to pay the IRS next year at tax time: the rest of the penalties for cashing in my 401K to buy cash flowing rental properties. My estimate is that I will owe 50%. 20% was withheld, so I cranked out what the other 30% was, and penciled that into another column of my spreadsheet. 

Sounds like a lot of work, right? If you have online banking, see if they let you enter other accounts. Mine does. They integrate with lots of 3rd party systems, effectively logging in and finding credit card balances as well as mortgage balances from other lenders. My bank also lets you enter in a street address to a piece of property and then looks up its estimated value from Zillow. Finally, for those accounts they can’t look up, I can manually enter the amount. A rough estimate, I know, but useful in glancing at my bank’s pre-built “Net Worth” report. I have found that this report is pretty handy, and gives me a good readout on exactly what my net worth is.

But the real question here is: WHY do I need to know my net worth? The answer: to tell if your investment plan is succeeding! My net worth includes entries for my 401K plan. Did I mention that I couldn’t make an early withdrawal on my current company plan, so I still have some money there? But there is no way to succeed at tracking net worth, unless you start logging it periodically in a spreadsheet, say once a month. This allows you start plotting the course your finances are taking. If your net worth can be tracked in less than 20 columns of dollars, then you can easily spend 10 minutes a month to grab the numbers and punch them into a spreadsheet.

Add up all the assets. Add up all the liabilities. Subtract one from the other, and you have your net worth. Divide it by the first entry, and you have your total growth. Don’t forget to include the date you gathered this set of numbers. The piece de resistance? Subtract the current entry from the first (spreadsheets convert this into days), and divide it into 365. This generates a nice fraction. Now take your total growth and apply this fraction as an exponent => (total growth) ^ (365/total days). That is your annualized growth rate of your net worth, the “average” rate your net worth is growing at.

Start tracking it. Even if you don’t do anything else I suggest on this blog such as dumping your 401K to buy real estate. Start tracking your net worth. When the next market crash hits, don’t be afraid to either read next 401K and punch it into your spreadsheet. When the market takes a hit, I can bet you that so will your funds. Well, we know that, because the Wall Street financial advisors are telling us that. But more importantly, we will see that their advice about “stay the course” isn’t good enough, and will slowly but surely kill our long term growth rate.

I honestly wish I had built such a spreadsheet dating back to 1999. Then I could really see the graphic carnage that the 2001 and 2008 market corrections did to my net worth. But I didn’t want to. I thought I was doing fine, following everyone else. Maybe if I had been really been paying better attention, I wouldn’t have waited so long to make my own correction to my retirement plan. The reason we tend to “go with the flow” of using 401K-wrapped mutual funds, is because everyone else is doing it, we aren’t aware of anything better, and we aren’t aware of how rough it is to our net worth annualized growth rate over time.

4 thoughts on “What is your net worth?”

  1. Hey Greg– Great post. Your last post convinced me to finally calculate my own net worth via spreadsheet. I look forward to tracking my progress periodically and using the metric to drive my success. Did you pick up your duplexes around Austin? How is everything working out for you?

    1. Hey Kyle! I was wondering if I would draw your attention. I’m glad you liked my post. It sort of dawned on me to get cracking on that spreadsheet when I heard a sermon series at church asking “Where are you?” You can’t plot a course if you don’t know where you are, and I realized how perfectly it dovetailed with this.

      Regarding Austin, we’re off to a great start. We have 3 out of 4 units leased so far, and we’re STILL cash flow positive by a nice margin. Got first check at the beginning of October. Next month will start the nice mortgage payments.

      My focus for now is looking for every single tax deduction I can take before the end of the year to reduce that big check I’m going to have to write. Talked with CPA for over an hour discussing options.

      Really feels good not being that hip-tied to the stock market anymore, but instead to something much more solid. I also like knowing I’m not just wishing my 401K grows in value (as I’ve heard other friends say).

  2. One of my big problems with the company 401k is that you have such limited options. As you’ve discussed, you’re at the whim of a fund manager and the other fund investors.

    As such, I’m with you on the real estate. I’m actually looking at picking up a property in the Austin area. How do you like your property manager?

    Good luck minimizing your tax hit this year. You’ve got a solid plan so any lumps you take this year will pay off ten-fold down the line.

    1. So far things are alright, but I’ve only had one pay cycle, so it isn’t much to go on. They email me detailed reports showing total rent paid, their fees, and make automated deposits into my account. Whenever I email a question, they usually answer within 1-2 days.

      To my fortune, the three existing leases were signed at least a month before I closed on the property, meaning the builder paid their 75%-of-first-month-rent finder’s fee instead of me. But considering the work it takes to do all that background checking, etc., and I don’t mind paying it to get a good quality tenant.

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