We’re speaking with Adam Young on why he’s come to evaluate his own financial well-being — by calculating, and continuing to grow — his overall net worth.
Some highlights from the discussion:
WHAT IS 'NET WORTH'?
Net worth is the value of the assets you own, minus the liabilities you owe. My wife and I have found that knowing our net worth is one of our best indicators to make sure we’re on target to meet our financial goals. We always had a goal to be debt-free, to pay for our children’s college, and to help them embark on their adult lives. And, ultimately, we want to retire early. But to do so, we need to be on target. Net worth is our way to see what’s holding us back. It’s a powerful indicator of our financial health.
HOW DO YOU CALCULATE NET WORTH?
Calculating your net worth requires you to take an inventory of what you own, as well as your outstanding debt. When I say “own,” I include assets that many of us are still paying for, such as a car or a house. For example, if you have a mortgage on a house with a market value of $200,000, and the balance on your loan is $150,000 — you can add $50,000 as an asset.
The formula is: ASSETS ( - ) LIABILITIES ( = ) NET WORTH
Your income is not Included in a net worth calculation. A person can bring home a big paycheck but have a low net worth, that is, if they spend most of their money. On the other hand, even people with modest incomes, can accumulate significant wealth and a high net worth — if they buy appreciating assets, like real estate and are strong savers and investors.
TO ENSURE PROPER GROWTH, YOU WILL NEED NET WORTH BENCHMARKS. HOW DO YOU KNOW, HOW YOU STACK UP?
You should understand your own financial progress over a period of time. We've got a three-ring binder in which I print a form on the 15th of every month — currently we have two and a half years of data — for evaluation. That way, we can strategically see the decisions we made and how our decisions affect the net worth of our household. We read these documents like a book, to where we can look and say, "We just grew our net worth by X dollars." That reinforces the importance of what we're doing and helps us to keep it up.
Year to year your net worth might fluctuate, but overall the trend should be moving upwards. When it come to net worth, the one true benchmark should be yourself. However, if you want to know how you're doing compared to your peers check out this chart from the Federal Reserve Bulletin's Survey of Consumer Finances from 2019 [PDF].
WHILE YOU CAN CAPTURE YOUR FINANCIAL HEALTH QUICKY USING THE FEDERAL RESERVE'S CHART, ISN'T THERE A DANGER IN COMPARING YOURSELF TO OTHERS WITHOUT A LOT MORE INFORMATION?
Your net worth is valuable to know, but yes, make sure you’re looking at the full picture. Net worth benchmarks are valuable to compare against, but it is just one metric. Net worth is all about managing your debt — especially student loan debt. Like a mortgage, student loan debt is good debt. With a degree, you can expect to get a higher paying job. But also like a mortgage, buy too much house or pay too much college — and you can be in the red for a longer period of time. A positive net worth within 10 years of entering adulthood can be a good benchmark. What you should do in early adulthood is lay the foundation for your entire financial life.
AS WE DISCUSSED EARLIER, YOU CAN'T START USING NET WORTH AS A METRIC WITHOUT A PLAN. AND YOU CAN'T CREATE A FINANCIAL PLAN WITHOUT KNOWING WHERE YOUR MONEY IS GOING EVERY MONTH.
Any financial plan starts with a budget and thorough evaluation of your current financial state and future expectations. My wife and I started by looking at out income and expenses. We were really making great headway on a lot of our liabilities — especially when it came to the mortgage and student loan debt. But what was a bit out of hand was impulse purchases like food. So, we strategically decided that were going to stop swiping our cards for food. We developed a cash-envelope system that we still use to grocery shop and to go out to eat. We love to go out to eat! It was something that we didn't want to sacrifice, but we needed to plan for within our budget.
WHEN LOOKING AT THE DATA FROM THE FEDERAL RESERVE, WE SAW THAT MEDICAL DEBT WAS THE MOST SIGNIFICANT CAUSE OF BANKRUPTCY. THE BURDEN OF MEDICAL DEBT CAN BE PRETTY OVERWHELMING. BUT IT DOESN'T HAVE TO BE.
Yes, and I want to add that 40 percent of those who filed bankruptcy for this reason had health insurance. So, it's important to look at if you have enough coverage. If you don’t already have disability insurance, now might be the time to investigate it. If you are unable to work, disability insurance can replace that lost income. Remember, Medicare doesn’t cover the cost of things like home health aides. So if you think you will want to stay in your home as long as possible, consider buying long-term care insurance.
CAN AN INSURANCE POLICY BE CONSIDERED AN ASSET, WHEN ADDING UP YOUR OVERALL NET WORTH?
Well, it depends. Whole life insurance and other types of life insurance with a cash-value component are considered assets. But I wouldn't list it as an asset. When it comes to assets, my wife and I have a $1,000 rule. If we can confidently sell something for $1,000 — then we list it as an asset. For example, a baseball card collection. But it’s really important to be honest with yourself about the value of that collection.
AND IT'S IMPORTANT TO KEEP IN MIND THAT WHEN IT COMES TO NET WORTH, THE NUMBERS ARE INDIVIDUAL TO ALL OF US, RIGHT?
Yes, financial situations differ. And at TCU, we're always ready to help you get there. Some of us live in areas where the cost of living is low while others will remain childfree. Some of us will inherit money from our parents. I compare net worth to what we watch on TV. It's an escape. It's fun. But it becomes dangerous when you start internalizing it and confuse net worth for self-worth. Your net worth is a lot like your weight. It's a single number that does an adequate job of capturing your financial health, but it’s just one metric. And remember, it’s never too late to rethink your choices in order to save.
This article is for educational purposes only and doesn’t constitute tax, legal or accounting advice. The following is general information, not recommendations. Please consult with an attorney or tax professional for guidance.