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Speaker 1 (00:00): I believe that your net worth is your most important financial metric. As a matter of fact, it's the financial metric that paints the clearest picture of how well you're doing with your money. See, you can have a high credit score with no money in the bank and you can have a lot of money in the bank, but owe a lot of money towards consumer debt and student loans and all those things. And you can even have a super high income with absolutely nothing to show for it, but liabilities, but a high or even consistently growing net worth is the one thing that shows just how well you're doing financially. So what exactly is your net worth and how do you calculate it? Well, let's talk about it.
Speaker 2 (00:55): [inaudible] [inaudible] so
Speaker 1 (00:55): before we get into the details of net worth and calculating it, we first have to define what it is clearly and simply put your network is the value of your assets minus the amount of your liabilities. To put it more practically. If you sold everything significant you own from your businesses to your houses, cars, whatever, and then added up all your cash from the sell of those items that you just sold to your bank accounts, retirement accounts, the shoe box under your bed or whatever else, then you took all of that and paid off all your debt. The amount of money you would have left would be your net worth. Now, I have to point out that this means your net worth could be negative or it could be positive. Again, it's just the value of your assets minus the total of your debts. So why is your net worth so important?
Speaker 1 (01:46): Well, to put it simply, a lot of bad decisions will negatively impact your net worth and a lot of good financial decisions should raise your net worth. This means that by actively tracking your net worth, which is something that I personally do monthly, I can tell whether I'm consistently making solid financial decisions or if I've slipped into the habit of making poor ones. For example, if I blow most of my paycheck on fast food and trendy clothes and then I have to rely on a credit card to pay my bills, I'm left with absolutely nothing of value and I've added onto debt, so my net worth will start to trend negatively. But if I take that same paycheck and invest half of it into some investments that grow over time, my net worth will consistently increase, or even simpler than that, I can find little ways to save money every month and then actually set that money aside and save it and my net worth will grow.
Speaker 1 (02:43): I also want to point out that you can become debt free, continued to spend all of your money and your net worth will actually be zero, which essentially means you're broke. So it's just not enough to be debt free. That's one of the reasons why when I'm interviewing guests, the debt free stories, I often ask them what they plan to do to build wealth for themselves going forward because finance is so much more than just debt freedom. And I often say that debt freedom is really just you getting back to broke or getting back to that zero net worth. And so the other part of the equation is you don't even have to be debt free to have a positive net worth. So if you have a hundred K in the bank and you only owed 10,000 on student loans, or even if you owe 90 on student loans, you could pay off the loans and still have money in the bank, which I mean, I wouldn't recommend keeping $90,000 in the bank, but that's for another episode.
Speaker 1 (03:37): So yes, you do need to be tracking your progress to debt freedom. And yes, you should have an idea of what your credit scores are. But more importantly, you should be taking a look at your net worth, either monthly or quarterly. And as you examine your net worth, you need to ask yourself why it's going up or why it's going down over time. This is going to help you build good money habits and eliminate some of the bad ones. So how do you even calculate your net worth? Well, the first step to this is to list out the value of all of your assets. This includes, again, the balance of your checking and savings account, your retirement accounts, any stocks or bonds you own, the value of your house, and even the value of your car. Now some people don't include their car in their net worth calculations, but I do.
Speaker 1 (04:24): And that's mainly because when I owed money on the car, I counted it on the debt side. So it just kinda made sense for me to keep that as part of the equation on the asset side. And again, it's pretty easy to sell if I needed the cash and you know, so for me it just makes sense to keep it there. Now I usually don't list anything that is less valuable than my car, like TVs, jewelry or stuff like that. Because it, it's just pretty tedious to do it every month and try to keep up with the value of all that stuff. It's just a pain in the blood. So I tend to keep it very simple. It has to be at least worth my cars or above to get counted in my net worth. And that's just one of the things that I do. But again, I list all of that out and I add the value of all of that up.
Speaker 1 (05:08): And that gives me the total value of my assets. So from there, you need to list out your debt and debt is just money you owe. And that could be whether you're current on the payments or whether you're behind on the payments. So the amount left you have to pay on your mortgage or your car loan, um, the total of your student loans, any credit card balances, even that personal loan that you took from a family member or a friend, that's technically a debt because you owe that money. So again, just list out any money that you owe and add all of that up. So once you're done adding a both columns, the assets and the debts, you then subtract the debt from the assets and see what you come up with. And that number is your net worth. So let's say you have 5,000 in the bank, uh, 20,000 in retirement savings, a paid for car worth, 7,000 I'm punching these numbers into my calculator so I can't remember him.
Speaker 1 (06:03): But, uh, 19,000 in student loans, a house that's worth 175,000 and a remaining mortgage balance of 160,000 right? So you would list the five K in the bank, the 20 K in retirement savings, these $7,000 car, the $175,000 house in the asset column. And in the debt column, you would list the $19,000 in student loans and the $160,000 that you still owe on the mortgage. So for this, your total assets would be $207,000 and you would still owe $179,000. So you would take the amount you owe, which is 179,000 you would subtract it from the two Oh seven that your assets are worth. And that would leave you with a network of $28,000. Now remember what I said earlier, that number can be negative or positive. So if you have a lot of student loan debt and you know you just graduated college and you just got your first job out of school, your net worth is probably going to be negative.
Speaker 1 (07:17): And that doesn't mean that you're necessarily awful with money. It just means that up to that point you haven't built up enough assets to cover the debt that you took out. But your net worth can also be negative because you've been using credit cards to overspend and that to behavior you will need to address, which is why again, I said you should track it monthly and then sit down and analyze why your net worth is what it is, whether it's poor spending habits or again, whether it's something like student loans that you took out to get through school and now you're making a good income and all those sorts of things. So, um, now you may be wondering just kind of what some practical ways that you can grow your net worth are. Well, the simply put, to grow your net worth, you need to either increase your assets or decrease your debt.
Speaker 1 (08:02): And so this can look like putting more money into your work 401k plan or paying down debt like credit cards, student loans, and even your mortgage pretty quickly. So it's pretty simple. I mean increase your assets, decrease your debt, and that's going to help you grow your net worth over time. So to wrap this up, your net worth is important because it allows you to monitor your financial progress over a specific period of time. And if your net worth is trending upward in that period of time, just keep doing what you're doing. But if you see your net worth is going the wrong way, this is a great time to break out the spending plan and see where and how you can improve to get your net worth going in the right direction. So if you'd like to calculate your net worth for free, I have actually built a calculator on my website, which you can find winningtowealth.com/calculator that is winningtowealth.com/calculator you can always do pen and paper, but I figured I would throw this out there for you guys. There is a calculator on the winning to wealth site that you can use to calculate your net worth and it's absolutely free. Also, be sure to check back on Wednesday as I'm going to be sharing an interview with a 26 year old who has built a network over $700,000. It's an incredible, incredible episode that you definitely don't want to miss, but
Speaker 2 (09:27): thanks again for listening to another money talk Monday and we'll talk soon. [inaudible].