What should my net worth be?
How do you figure out how you are doing financially? This is the big question people always have, and the first place they look is the Income. Do I make over 100k a year? Can I buy the things that I want to buy? This is partially true, but it is only the starting point. This only takes into account what you bring in. The more important question is what do you do with it? Enter Net Worth Calculation.
The Net Worth Calculation is Assets - Liabilities = Net Worth. This is the balance sheet side of your financial life. It is the value of assets like bank accounts, investment accounts, 401ks, houses, college funds etc. Assets that you can value. The Liabilities are amounts that you owe like credit cards, mortgages, student load debt, car loans, all those great 0% interest offers out there.
Please note that Net Worth is to be compared against yourself not others. First of all it is not a good conversational piece to talk about with families, friends or coworkers. Also it is not productive. If you were comparing your net worth to others you would start to get jealous, and try to push things a long outside of your values and principals. Or you might start to lose humility and start to think you are better than others. I liken it to golf. I am not a good golfer, once I start comparing myself to good golfers I start doing things differently trying to compete, ultimately changing my game and messing up my swing (not too hard to do). I keep score for myself only and aim to do better than the last time out.
For Net Worth calculations, I like to keep things simple and only add assets that are readily identifiable, consistent and can be easily valued. The consistency is key. For a long time I would go to Zillow and get the value of my house each month. I did not see that as productive. It would go up or down each month, and it was not easy to sell, and if I did want to sell I would need to find somewhere else to live which would most likely suck up the gain I realized. So I keep my house at cost, so it is consistent. Plus, it is conservative. I also don't keep cars in my net worth. The reason being is that cars depreciate (from the moment you drive it off the lot and every mile after). Plus, by counting the loan but not the car it really makes me think twice about buying a car, as it will have a big impact on my Net Worth. I also don't keep other assets like furniture, jewelry, or other household items. So really on Assets it is really just financial assets like, bank accounts, investment accounts, money markets, cash in the safe, money you have loaned to others (if you plan to collect), rental properties, business assets etc.
Liabilities, the conservative side kicks in here. Anything you owe someone else goes in this listing. That is mortgages, student loans, credit cards, personal loans from friends/family, I even put my property taxes as they are paid every year and a fairly large amount of money. This is where you want to list everything. For one it will keep your debts top of mind, and two it will be conservative. If you don't pay them at some point there will be ramifications down the road.
You may ask "If I cannot compare to others, how do I use this information?". There are a couple of ways. The first way is to compare year over year. This is where consistency comes in. How much did my net worth increase over the year? A metric I like to do is look at how much my total net worth went up, then subtract out unrealized gains/losses on investments, this tells you the impact of what YOU did with YOUR income and expenses throughout the year! It is a really good tool. The other is something I read in the book The Millionaire Next Door by Thomas J. Stanley Ph.D and William D. Danko Ph.D. It is a simple calculation that has its flaws, but is a nice way to see where you are. Take your age * your total annual income then divide that by 10. That would give you an expected net worth. It is very high level, but it helps you see how you are doing. Once again, this is more on the trend verses the actual number. So I do a long range budget out 5 years. Do I see myself closing the gap to that expected net worth number? Do I see myself exceeding it?
The best way to track this is to set up an excel or google sheet. So what is your expected net worth? Are you close to your number?
