I’ve been neck deep in personal finance, blogs, books and tools for about ten years. But, it was only a few years ago that I began paying regular and close attention to my net worth—arguably, the only metric that matters.
To know your net worth is to have a comprehensive understanding of your financial history, the inflows, outflows, pace and direction you’re moving in. For those of you who don’t know how to calculate this number, “allow me to break it down for you so it can forever and consistently be broke.
The total value of your assets minus the total value of your liabilities equals your net worth.
Your assets are the things that have monetary value such as cash, investment accounts, property, cars etc. Your liabilities are the value of what you owe such as loans, notes, mortgages and other debts. Not unlike the concept of equity as it relates to homes, your net worth is the difference between the total value of your assets, less the value of your debts. For example, using the example below, the difference between $265K and $229K is a net worth of $36K.
Knowing this is key in order to build wealth because we must be able to measure the impact of our financial decisions as a whole instead of focusing on individual components of this very simple math problem. In my experience, it is quite common for people with high hopes, high incomes and big a$$ houses to focus on those things instead of their net worth. But at best, doing so is short-minded and will lead to flawed decision making.
Furthermore, what good is it to have a valuable home if you have no equity? What is the benefit of a high income if you don’t have enough to invest. If you’re team FOMO, or team “you can’t bring it with you” then more power to you. But for anyone that plans on living beyond the age of 45ish, I need you to know your net worth like you know the story your Momma’s about to tell when ya folks come over.
Tracking your net worth is also important because it allows you to see and make changes on both sides of the equations [assets and liabilities]. For example, let’s assume you’re desperately in need of more money at the end of the month. Most people tend to explore different ways to improve that situation by seeking better job opportunities. It makes perfect sense to assume that with a new, higher paying job you can increase your earnings to give yourself the breathing room you’re looking for. Some people take it a step further and pursue re-education, certifications and other time and money consuming activities with the intent of making themselves “qualified” for higher earning positions. Unfortunately, what many people don’t realize is that oftentimes, it’s much easier, quicker and more sustainable to cut back on expenses or to pay off a debt than to make more money.
Put another way, paying off a debt early so that you have one less monthly bill is by far a more effective way to give yourself a raise. Once that debt is paid for, the money that went towards it can be re-routed to other things that boost your net worth and give you the cushion you’re looking for. The greatest benefit of this approach is that it doesn’t require more work of you whereas if you got that new high-earning position, you will have also assumed the new responsibilities, maybe a new route to work, the growing pains of a new boss/team, different hours and potentially a shiny new tax bracket.
That is exactly what we did. We paid off our car notes, student loans and credit card balances all to create a massive surplus at the end of the month that we then used to pay off our mortgage. Now, with all of those bills behind us, we use that larger surplus to invest at at an approximately 70% savings rate. That’s > 66% pts. higher than the average American savings rate which is a lowly 3.1%.
Will we do this forever? No…because we won’t have to.
I find myself making this point quite often to people looking for that sexy investing tip or advice on rental properties as a way to get some more cash at the end of the month. I repeat, paying off debt is by far the most effective way to build wealth in the short and long term.
There are several ways to track your net worth but given we’re in the digital age, we use and are huge fans of Personal Capital. After entering all of your accounts and any other assets, the tool tracks and provides you with a graphic representation of your net worth. From there, you can see how it’s changed over defined periods and in real-time as the market changes.
According to MarketWatch, as of September 2017, the median net worth of an American family was $81,200. That’s only $700 more than it was in 1992 and $54K less than the previous high in 2007; prior to the economic collapse of 2008.
For Black American’s, unfortunately the picture is butt ugly since “nearly 1 in 5 black families have zero or negative net worth — twice the rate of white families“. Furthermore, according to the Washington Post article, the median net worth of white families was approximately 10X more than that of black families as of 2016. Even worse, a recent Forbes article stated that by 2053, Black households will have a median net worth of zero.
This is what infuriates and inspires us. This is why we’re doing what we’re doing.
It is why we believe so passionately about inserting our voice into the conversation about wealth in America through this platform. While we [r&R] are clearly outliers, we have experienced the full spectrum of wealth and are currently on the rise. But I gotta tell you…it’s a lonely club. As you can imagine based on the numbers mentioned above, there aren’t many of “us” up here. So let’s change that.
Mr. r & R