How Do You Figure Out How You’re Doing Financially? Look at Your Net Worth.

You ever look at your Net Worth? You know, all the stuff you own minus all the money you owe? No? Well, then, you’re exactly like most of my clients.

In perhaps one of those examples of why Normal People don’t like financial advisors, we tend to focus on “Net Worth,” a concept which very few of said Normal People ever think about. So, when I present a client’s Net Worth to them for the first time, they end up asking me “Is that good? Bad? What should it be?”

The best I can hope for is confusion. The worst, panic. Go Go Gadget communication skills!

You likely view and think about your money through lenses other than Net Worth:

• the lens of monthly income vs. expenses
• the lens of how many dollars or percentage of your income you’re saving each year
• the lens of how much debt you have and how fast (or not) it’s going away
• the lens of how your investments or your company stock is doing

And all of these lenses are great! They give you good, useful information for evaluating how your finances are doing. But this blog post isn’t about those things, now is it?

I want to focus on Net Worth because it is perhaps the broadest measurement you can take, the best overall proxy for how strong your finances are, or are getting. (As my therapist says, “It’s not about being good, it’s about getting better”…is it ever thus!)

How to Figure Out Your Net Worth

Let’s meet Jane, single, 32 years old. Jane owns a home, but has a mortgage on it. She’s got some student loans. She has a nice emergency fund at her bank (go you, Jane!) and a 401(k) at her job.

What Jane Owns (Assets)	What Jane Owes (Liabilities)
Home: $500,000	Mortgage: $350,000
Bank account: $30,000	Student loans: $30,000
401(k): $30,000
Total Assets: $560,000	Total Liabilities: $380,000
Net Worth: $180,000

Jane has a Net Worth of $180,000. Is that good? Is that bad? Should she be proud? Freaking out? Lo I sayeth unto you, it’s neither good nor bad, and be neither proud nor freak-some.

What Story Does the Snapshot Tell Us?

Now let’s meet Sally. Sally also has a Net Worth of $180,000.

What Sally Owns (Assets)	What Sally Owes (Liabilities)
Bank account: $50,000
401(k): $130,000
Total Assets: $180,000	Total Liabilities: $0
Net Worth: $180,000

Jane and Sally have the same Net Worth. Does that mean they’re in the same situation? Nope!

Sally: Sally’s financial assets are much more flexible: it’s all in “liquid” accounts, her bank account and 401(k). Also, she has no debt. So if, say, she loses her job, she could reduce her monthly expenses more easily than Jane could, because she doesn’t have those required loan payments.

A few factors can affect Sally’s Net Worth: how much she saves, and how her 401(k) investments perform.

Jane: On the other hand, Jane’s Net Worth is mostly from the value of her home. This means her Net Worth is largely at the mercy of something she doesn’t control: the real estate market. Also, as long as she lives in it as her home, all the value wrapped up in her home is rather a moot point: she can’t use it to put groceries on the table or pay for a doctor’s visit.

Many factors can affect Jane’s Net Worth: how much she saves, how her 401(k) investments perform, the performance of the housing market, and how aggressively she pays down debt.

Using the Net Worth to Figure Out What’s Going On with Your Finances Over Time

Fast forward a year, and let’s return to Jane’s Net Worth.

What Jane Owns (Assets)	What Jane Owes (Liabilities)
Home: $600,000	Mortgage: $330,000
Bank account: $30,000	Student loans: $0
401(k): $30,000
Total Assets: $660,000	Total Liabilities: $330,000
Net Worth: $330,000

Wow! Her Net Worth rose $150,000 in just one year! Is she some sort of financial genius? Well, she’s doing some good things, but she’s also lucky. So, what’s the story?

To be sure, Jane really put her shoulder to her student loans and paid them all off in one year. And she continued to pay down her mortgage as scheduled. But that 401(k) balance didn’t change. What happened there? We figured out that Jane did contribute some money (not the max), but the investments lost money.

The biggest boost came from the increase in her home’s value, an increase of $100,000.

Focus on What You Can Control, Not What You Can’t

That boost from her house’s value? That is something she has no control over. Now, I’m not gonna complain if you Net Worth skyrockets because the stock market or real estate market is doing well, but nor am I going to depend on it.

Sure, you might be lucky when the real estate or stock market goes gangbusters, but it can just as easily not help you, I’d much rather see you steadily improve your Net Worth by focusing on the things you do have control over: your savings and debt payments and investing reasonably. (I say “reasonably” because there is no one best way to invest. Of course, there are many many not good ways to invest. See also: high expenses and thinking you’re smarter than other investors, otherwise known as market timing.)

(By the way, I don’t mean to come across as reviling home ownership. I own one myself, after all! Just keep in mind that homeownership can dramatically reduce the flexibility in your financial life. It’s hard to get out from a mortgage payment, and you turn “liquid” cash into very “illiquid” real estate.)

The Value Is in the Questions You Ask

Calculating your Net Worth is a matter of arithmetic.  The hardest part is probably remembering all the places you have money (or owe money). When you collect those numbers, ask yourself:

1. What makes up my Net Worth?
2. What has the biggest effect: Assets or Liabilities?
3. Which asset dominates? Which liability?

You’re just getting a baseline. Not making any judgments.

Next year, and every subsequent year, calculate it again and compare to the previous year’s. Ask yourself:

1. Is your Net Worth bigger or smaller? Why? Was the change under your control?
2. Are you Assets bigger or smaller? Why?
3. Are your Liabilities bigger or smaller? Why?
4. What one component of your Net Worth changed the most?

It’s really that easy.

Do You Want to Retire Soon or Early?

If you are planning on some sort of early retirement, your Net Worth takes on another level of importance. Year over year, you can use it to see how close you’re getting to the ability to retire.

For a rough sketch of how close you are to being able to retire early, use the 4% rule of thumb: Multiply your “liquid” assets (not your house, unless you’re planning to sell it) by 4% to calculate the amount of money you can withdraw from your portfolio every year without depleting your investments. So, if your liquid assets are $500k, 4% of that is $20k/year. Probably not going to be enough to live on. But you can hopefully watch your Net Worth inch closer to $1M (eventually), and that’d give $40k/year, which is getting closer.

It’s a rough calculation, to be sure, but viewing that progress towards Freedom! Independence ! F-U Money! Can be really motivating to save more, pay down debt, and, most importantly, don’t do anything dumb. (Truly, one of the luminaries of the financial planning profession, Dick Wagner, is quoted as boiling down financial planning to “Save more, spend less, and don’t do anything stupid.”)

Do you want to understand, at a high level, how your financial strength is evolving over time, and how each part of your financial life works with the other? Reach out to me at  or schedule a free consultation.

Sign up for Flow’s Monthly Newsletter to stay on top of my blog posts (and the occasional video), and also receive my guide How to Start a New Job (and Impress Yourself and Everyone Else) for free!