The figure that I track more than anything related to my overall financial health is net worth. A Net Worth Statement is effectively a balance sheet that combines personal and corporate investments into a financial snapshot. The calculation lets me know all of the assets that I own or have in my possession and the calculation also lets me know how much money I owe.
Assets are anything that you own that has monetary value. Examples of Assets are bank accounts, brokerage accounts, retirement accounts, real estate, automobiles, investments in businesses, and any other personal property. Once the Assets are totaled, you know the value of everything you and/or your entities own.
Liabilities are your financial obligations that you are required to pay back. Examples of Liabilities are credit card debt, installment accounts for automobiles, boats, or planes, loans on retirement accounts, loans on life insurance, mortgage debt for real estate, unpaid taxes, and anything else where you many owe a person or company money. Once the Liabilities are totalled, you know the amount of all of your financial obligations.
Determining your Net Worth is simply the difference between your Assets and Liabilities. A positive Net Worth means that your Assets are greater than your Liabilities. For example, let’s say that you have Assets of $1,000,000 including your primary residence, real estate holdings, bank accounts, and retirement accounts. Let’s also assume that you have $700,000 in Liabilities inclusive of your real estate mortgages, student loans, and credit card debt. To determine your Net Worth, you subtract $700,000 from $1,000,000 to learn that your Net Worth is $300,000.
A negative Net Worth means that your Liabilities are greater than your Assets. For example, let’s say that you have Assets of $500,000 including your primary residence, real estate holdings, bank accounts, and retirement accounts. Let’s also assume that you have $700,000 in Liabilities inclusive of your real estate mortgages, student loans, car loans, boat loans, and credit card debt. To determine your Net Worth, you subtract $700,000 from $500,000 to learn that your Net Worth is -$200,000.
Many people have a goal to obtain a Net Worth of $1,000,000. Becoming a millionaire is the goal for many. Having a Net Worth greater than $1,000,000 makes you a millionaire. It does not necessarily mean having a $1,000,000 in the bank although I hear this misconception often. To be a millionaire, you can have $100,000 in your bank accounts, $400,000 in your retirement accounts, and $800,000 in real estate for Assets of $1,300,000. If you only owe $300,000 on your primary residence and no additional debt, you have a Net Worth of $1,000,000. It is wise to take stock of your Net Worth and monitor it as you add Assets and Liabilities to your Balance Sheet.
My goal is to grow my Net Worth monthly. That means that I am constantly looking for Assets to invest in that bolster my Balance Sheet. I am constantly looking to add Assets to my Balance Sheet that produce monthly or quarterly cash flow and that have upside potential. I also look at ways to reduce my personal and corporate liabilities, as the reduction in debt will also increase my Net Worth.
Action Items for You
- Create or invest in a Net Worth template and Schedule of Real Estate (SREO) template
- Make a list of your Assets
- Checking Accounts
- Savings Accounts
- Brokerage Accounts (Stocks & Bonds)
- Retirement Accounts
- Real Estate Investments
- Business Investments
- Accounts Receivable
- Cash Surrender Value of Life Insurance
- Personal Possessions
- Make a list of your Liabilities
- Credit Cards
- Student Loans
- Installment Loans
- Real Estate Debt
- Loans Against Retirement Accounts
- Loans Against Life Insurance
- Accounts Payable
- Subtract Your Liabilities from Your Assets to Determine Your Net Worth
Now that you know your current Net Worth, you need to set Goals about where you want to be over the next year, over the next five years, and where you want to be long-term (10 years, 25 years, etc.). I undertake this process personally every year. Sometimes I achieve all of my goals over the year and sometimes I achieve most of them. My goal for my personal Net Worth keeps getting larger because I have continually pushed through my expectations.
I have increased my long-term Net Worth goal, and my new goal is a little harder to see at this point, but I believe that it is possible. By continually adding value to my clients and members, and by making smart investments, I believe that I can achieve my long-term goal.
I am 44 years old and my horizon for my goal at this point is 21 more years. My net worth goal is arbitrary, as is the amount of time that I’m giving myself to achieve the goal, but I know that once I achieve that goal, I will have created enough generational wealth to pass on that will give my heirs more possibilities to add value to their clients, families, and charitable endeavors in the future.
I want you to challenge yourself. As Jack Canfield says, it takes just as much work to dream a small dream as it does to dream a big dream, so why not always dream big?
Dream big, set high expectations for yourself, and believe that you can and will achieve your goals. Here’s to you increasing your Net Worth to the level that you set for yourself.
Until next time, happy investing and let’s continue growing our passive cash flow and net worth together!