Happy Day to you. This is Ken Kaufman CFO and I am thrilled that you’re here for Episode Number nine, track your net worth.
As you recall, we talked through the impact network model and the six key principles that are needed in order to properly build net worth to get the mindset right and the activities right in order to have all that come together.
Today we’re going to talk about exactly how you go through this process and why and what all of these questions around tracking net worth. Before I jump into those details, let me just share you a story for my business career. At this time in my career, I was doing consulting for businesses of a financial nature, Chief Financial Officer nature, and there was a business that had shut down. And the assets of that business were being contested in a divorce.
There was a husband and wife who co-owned the business – they had gotten sideways with each other, separated, and were going through divorce proceedings. And depending on which side you listened to, the other one had stolen a bunch of money out of the company. And ultimately, the company didn’t have enough money to make payroll and just shut down.
So within a few weeks, I was asked by the court, I was actually a court-appointed receiver to go into this business and do an assessment really of its net worth. I was looking at the balance sheet, which are the assets minus the liabilities equals the equity left, or the the net worth on our personal financial statements as we measure it that way. And I should stop here and say that really, our personal financial statement of net worth, it really is our balance sheet, and it’s our assets minus our liabilities equals this net worth or in business, sometimes it’s called the owner’s equity, your equity.
So I went in to this business, and very quickly looked at what cash was available and what was going on with the bank accounts, what receivables were available to collect an inventory, any fixed assets that could be sold. We went through all of this process to see could this business potentially be resurrected or turned around or brought back to life. We also had to look at all the debts or liabilities, which meant that we looked at what payables and vendors were owed money, what contracts were we in breach of because the shutdown of the business had actually stopped progress on certain projects. And customers had some expectations around that. And there it was creating liabilities for the company.
So we had to go through a detailed process and measure and pull this together and ultimately figure out what is the net worth of the business. There was also an effort to take a look at some forensic accounting because of the blame game that was going on between the spouses in this divorce case. But anyways, at the end of the day, it was a pretty complex process.
The end of the story is the business definitely did not make it and there were so few assets left, once liabilities were covered that it was de minimis at best. And it really ended up not being of any value in the in the divorce case. And I didn’t stick around long enough to see if or be even be informed of if there was wrongdoing found or how the ultimate estate was divided through the divorce process.
But needless to say, I had to go through this effort of pulling all this together and figuring out okay, how do we assess this? How do we assess the validity and the risks around it, and then come up with what the best strategy was to create the most value or the best outcome.
So I share this story, just to take something from my business life and bring it over and drop it in and say yeah, hopefully you don’t have that type of noise going on in your marriage, or those types of problems going on in your life in any way. But the effort to measure and track net worth is so worth it, especially on a personal level.
Now in a business, the net worth of the business is interesting, because you say assets minus liabilities. So if you liquidate assets and then payoff liabilities or debt, then what you have left is your net worth. And that’s interesting. But in a business, most businesses are worth so much more than what the net worth on the balance sheet says primarily because it’s what those assets and the leverage of that business are doing to generate cash flow in the future that drive valuation.
As individuals, or as families, when we look at our personal financial statements, and we look at our balance sheet, our net worth is actually the most important component of our overall financial life. Yes, we have an ability to generate income. But this is the why for why we bother to track net worth, our net worth actually represents the sum total of all of our life’s financial activities. And what it does is it actually eliminates the noise of all the stuff that’s happened day to day, week to week, month to month, year to year, all the transactions, all this activity that’s gone in and out of bank accounts and credit cards and loans and other assets and all of these different things. And it’s just a nice, clean way to take a look at Hey, are we actually making progress or not? Or is this a whole lot of activity with no progress? Are we moving backward? Or are we actually making progress, which when we’re measuring net worth means we’re going up and to the right, it’s increasing, hopefully month over month, year over year.
So as we understand the why behind measuring this, the next question really comes in as well. So then what exactly should we be measuring? I want to take you through the categories that we use, generally speaking, when putting together a statement of net worth for an individual or a family.
We start with what are called cash and cash equivalents. These would be bank accounts, health spending accounts, anywhere where you have cash flow that you could go and get access to it quickly. And it’s not invested in an asset that is volatile, you know, that may be going up or down from day to day or over time. But generally, these are very liquid assets that we can get access to very quickly without the volatility that could cause the worst of it when you liquidate it to you know, go up or down dramatically.
The next bucket to think of from an assets perspective, is what securities do we hold that are publicly traded, so stocks, bonds, mutual funds, ETFs. And these are things that would be considered outside of retirement accounts. So I’m not including any of those yet. So these would be if you have an E trade account, or a Vanguard account, where maybe you’ve got some stocks, and you like to try to pick stocks and play that game, or you’ve bought some ETFs. And you’re putting portfolios together for different things. This would be the place where that would go. This also includes any college savings plan accounts you have.
Then we need to account for all of the stock that we hold and privately held companies. For those of you that own a business, you’re saying Well, how do I even account what that’s worth? Well, there’s a way to go through that process. But if you are getting a K-1, or you have a schedule C business where income’s been provided to you on a regular basis, because you’re self employed, or you’re getting k-1s as a partnership, or you own shares in a company that’s not necessarily publicly traded, but it’s privately held. And it’s generating some type of activity for you: income losses, or anything in between.
Next is personal property like automobiles, jewelry, paintings, anything of significant value. In this category, I have a blanket number that I put in. Our cars generally aren’t worth much because we like to drive used vehicles and make sure that we get everything we can out of them before we would trade them in and then we would only buy used vehicles after that. So this usually for us isn’t a very big number. But again, any personal belongings that have a significant value you’d add up here.
Then you also want to add up all of the money that you have the value of all of your retirement accounts. This could be your 401k at work or your spouse’s 401k at work, it could be individual 401k, Sep IRAs, Keogh plans, it could be other pension plans, IRAs, Roth IRAs, rollover IRAs. I’m just throwing a bunch of names out to make sure that this triggers for you all these accounts. It includes 403b accounts or other accounts for nonprofit type organizations like that.
And then the last bucket from an asset perspective is any real estate that you hold. So if you own your primary residence that should be listed here. If you own rental homes, or any other real estate, property, land, everything that goes with that you put this in the real estate bucket. And that captures all of the assets.
On the liability side, first capture all of your credit cards. Now, even if you pay them off every month, there’s usually some balance on them at the end of each statement cycle. And we need to capture whatever those balances are at our tracking intervals. So I’m recommending, you have all your credit card listed here. And we’ll go through in a minute how you’re going to gather up all the information.
Next you’re going to want to capture any other payables. If you’re self employed, and you have quarterly estimated taxes, you need to have a dollar amount in here about how much is sitting in your bank account that, at the next quarter, you’re going to be paying to the IRS.
Next, any other notes payable and student loans need to be captured here. Even if you have a loan from a parent or a sibling, or any of these online period, peer lending in places where you’ve borrowed money, any other financial obligations to pay, where you’ve been advanced money needs to be captured here.
And the final liability category is any mortgages or loans you have against your outstanding real estate. So if you just have a primary residence that you own, that would be your mortgage, or perhaps if you have a second mortgage or a line of credit against that, we need to capture all of that here.
So that is a summary of all of the details you need to track. Now the question: how do we actually track it?
Well, as you list out all of your accounts, and all the places where these assets exist, you now need to gather up information about the valuation of these. And you might want to capture account numbers and ownership structure and other things based on the complexity of your situation. So you can just capture it all in one place. Now, as you gather your bank statements, and your quarterly statement from your 401k plan provider and the statement that comes from your mortgage company. And your home value doesn’t have a statement coming or your position in your privately held companies, the stock in those companies. So you need to do your best to estimate but you’re going to gather up information about each of these assets and debts.
Then I want to talk about the frequency. So how often should you track net worth, if you jump back to Episode One, I had done a poll in a group of people that were pretty financially savvy, strong budgeters looking at their money every day. And I asked them how often they tracked net worth.
And I found that 53% of them were tracking it monthly, 9% were quarterly, 6% were annually, and the remaining 32% didn’t even track it. I hope just that those listening to this podcast are making progress to where you can start tracking it if you haven’t, or we can help you make even more progress and get more momentum behind your building and growing your net worth. So we’ve got this breakdown of potential options, my position on this is you should be looking at your net worth on a monthly basis. And this happens in a couple of ways.
The first one is you want to set a goal for where you want each one of these categories of assets and liabilities where you want them to be at the end of the year. And this isn’t just pie in the sky goal, but goal setting that is Hey, I’m going to put an extra $250 a month toward my IRA this year, I’m going to have an extra 1% of my pay withheld for my paycheck to go into the 401k plan at my employer – that goal setting. You set that out for where you want to be at the end of the year. And then every month I go in and I have a little estimate column and I’m up the how I’m doing each month so that I can then track Hey, am I making progress, am I moving forward or backward relative to where I was trying to be at the end of the year. So I believe that you should be updating it monthly. And then you should care about keeping your year in numbers mostly. So that you can see year over year over year what progress you’re making and what your direction is. I have financial data that I’ve kept, unfortunately, I was doing it earlier. But I didn’t keep it and didn’t have a good digital format for doing it. But I have our financial net worth tracked back to 2007. And every year show what what happened and what changed over the year. So I’ve got about 12 years of solid data. And then the reality is I didn’t have a whole lot of net worth coming out of school barely making it building a family, going back to MBA school, or a lot of things that were obviously keeping me from really building up a net worth at least that would show on paper. But got that 12 years back. And it’s so helpful to take a look and see at the progress that we’ve made. And I’ll tell you some years it’s gone up and some years it’s gone down, it sometimes is, is well its life, things go up and things go down and things get really good sometimes, and then they’re not quite as good other times. So that from a frequency perspective, definitely track monthly. But make sure you capture the annual now where to do this, there’s budgeting software that does this mint com will do this. And you can even connect a lot of your accounts digitally so that it will calculate these things for you automatically. I think that’s great. I don’t love the software, because you just get got bombarded with advertisement after advertisement. But it is free. So I personally don’t use it. I’ve used it at different intervals in my life in the past. I know some people swear by it and love it for tracking their net worth. And that’s great. I’ve kind of steered away from that and gone to a more manual process. For budgeting I use you need a budget or it’s known as wine app. And there is a place in there for tracking accounts where you can manually update your account balances for a lot of these assets. And so I’ve gone ahead and put them all in there. And once a month I go in and I update those balances. And it’s got some interesting little reporting things. It’s not fantastic. But I can look and see what’s happening month by month, and it’s nice to track it. And especially if you have more debt right now than assets, meaning you have a negative net worth, Wow, this is so powerful to track because you may say well, why would I track it, I’m negative net worth well, because as soon as you can get that trend going up into the right, where you’re paying down debt, and you’re building asset, it feels so good. Even if you’re not above that zero line on that graph, it is still such a good feeling to see that you’re making progress and getting momentum toward getting the positive net worth and really building your network substantially.
I will say that the the core place that I keep everything is in Google Sheets in terms of how I track my net worth, especially, you know, on a year over year basis, but I go in and update monthly in the Google Sheet as well as I do in my budgeting software. I realize that’s duplicitous, but that’s kind of me and I like spreadsheets and those sorts of things. I do it on Google Sheets, so I can share it with my wife, and she can look at it and see it. We do discuss it. And I’ll get into an episode about this in the future. But we do discuss it every month, we have a monthly meeting. And we talked about what’s happening with our net worth and how we’re doing against our goals. That’s all part of getting alignment with partner. Once you establish your waterfall and what your priorities are.
Then I would tell you that this Google Sheet that I use, if you want a blank copy of it, I’ve I’ve gone in and cleaned it out and made everything blank to not pass along any personal information. Just send me an email Ken at net worth hacks dot com. Again, Ken at net worth hacks dot com, I’d be happy to share this Google Sheet with you, then you can take it and copy it and, and manipulated and do whatever you would like with it. And hopefully that would be helpful for you to see at least how I think about it.
Now, so that’s kind of covering a lot of information about how to track your net worth.
That and that’s really the content that I had prepared for this podcast. I’m going to jump in the next podcast to take on this topic of is budgeting a bad word. I think you’ll actually like it and be interested in it. But before I sign off from this podcast, I just want to reemphasize the one point that tracking network is so important. It is the most important metric in your financial life. Today, yesterday, tomorrow in the future, it should have been a long time ago if it wasn’t but that’s okay. We’re we’re picking up the pieces we’re moving forward effective today. And so I just want to encourage you to pay the price, whatever you need to dig in, start learning about this, figuring out how to track your net worth. And you will start to get clarity. And with clarity comes power because you start to gain insights and you can see what’s happening. And you’ll see that if you want your behavior to change to build and grow net worth.
First you need to get your mindset to change. And the only way you’ll get your mindset to change is if you track it. And you get that clarity and your mind will start to see and will automatically start to solve problems and start to see how you can make improvements. So I just want to give you that challenge wherever you’re at in your journey to tracking net worth. Let’s keep pushing forward. Let’s keep moving forward knocking down the barriers and challenges and getting a process in place so that we don’t have to think about it. It can be brainless as much as possible, so that we can keep moving forward up into the right.
Well, there it is track your net worth. Like I said in our next episode, we’re going to cover this question is budgeting a bad word. Make sure to subscribe to the podcast so you don’t miss it and future episodes. Feel free to leave a review. Give me some feedback. I’d love to hear what you think about the content I’m providing. If you have any questions, I’d be happy to try to answer them or if you have any topics that you’d love to hear me address, I do have a lineup of topics in the weeks and weeks and weeks in the future but would be happy to prioritize that based on things that you as listeners and participants in the Facebook group would like to hear. So I’d be happy to receive any feedback you’ve got.
Many, many thanks to you for joining today. This is a wrap for episode nine. Happy Day.
Transcribed by https://otter.ai