In the financial independence community, net worth means everything – or if not everything, it means a lot. When I started this blog five years ago, I actually went into it intending to regularly track and share my net worth each quarter. I ended up writing two quarterly net worth posts before I ultimately shelved the entire exercise (you can read them here and here if you’re so inclined).
The problem for me is that I’ve never really been someone that tracks my net worth. I use Mint and Personal Capital to track my finances and investments, so I always have a general sense of my net worth, but I don’t really track it monthly or quarterly as some people do.
The reason for this isn’t that I think net worth isn’t an important thing to know. It gives a nice, generalized barometer of how you’re doing financially. With enough data and time, you can get a decent sense of where you’re headed. Ideally, you want to see things moving in an upward, positive trajectory.
The thing is, I’m not really sure how important knowing your actual net worth is. To me, net worth has always felt like more of a vanity exercise, a way to compare yourself to someone else based on a number. We’re all human. And if there’s one thing I know people like doing, it’s trying to rank and compare things that really can’t be compared easily (see things like the US News school rankings, Forbes lists, Vault 100 law firm ranking lists, etc).
Here’s the interesting thing. As simple as you’d think calculating your net worth would be, it’s actually not quite so simple. There’s no clear consensus on what you’re supposed to include or not include. In many ways, it’s our decision about what to include or not that determines our net worth. Include fewer things and your net worth will be lower. Include more things, and your net worth will be higher. I feel like it lends more credence to my belief that net worth is often more about making us feel good.
My Net Worth – What Do You Include And What Don’t You Include?
The basic definition of net worth is simple – to get your net worth, take your assets and subtract your liabilities. What’s left is your net worth. The problem is, most people (myself included) aren’t really sure what counts as an asset.
We can take a look at my net worth to get a sense of how your net worth can fluctuate pretty dramatically depending on how you look at it.
In the financial independence community, it often seems like most people view their net worth as consisting of their cash and investments (in both taxable and tax-advantaged accounts). When I was writing this post, coincidentally, my friend Money Wizard also happened to write a post about why he doesn’t include his house in his net worth (and I swear I started writing this post before he published his post, so it was a coincidence that we both happened to write about net worth stuff at the same time).
When you include my cash and equity investments, minus the student loans my wife still has, we end up with a net worth of around $500,000. I’m 34 years old, and while I’m not as far ahead as many people in the financial independence community, I’m obviously better than most people.
That’s the most basic look at my net worth. But it leaves out a lot of assets I do own. Houses. Furniture. A car. Bikes. Businesses. These are all things that go on the asset side of the balance sheet because they do have monetary value. And if you add these things into the equation, my net worth can change dramatically.
Do You Include Houses In Your Net Worth?
I recently bought a new house. It’s an expensive house too – in the million-dollar range. My wife and I have a combined household income that makes it possible for us to afford a house like this, but we know it’s a lot of money to put into anything and it could very well be a huge mistake (we don’t know the future, so anything we do can only take into account what we know now and what we guess the future will hold).
Buying this house meant we needed to put down about $200,000 for our downpayment. We’ve had this cash saved up for several years and it was something that we would have likely considered as part of our net worth if I had been tracking it. After all, we didn’t need to buy a house, so that money was always there for us to use however we saw fit.
The question now is, after buying our house, what happened to our $200,000? Is it gone? You could argue we spent it, but that’s not exactly right. We bought a house. It’s not like we bought tickets to Disney Land. The money might not be easily accessed and we might not be able to get all of it back, but we could get at least some of it back if we wanted.
We also have our old house that we’re converting into a rental property. We lived in this house for 5 years and owned it for 11 years. It’s built up a lot of equity in that time. Conservatively, it has at least $150,000 in equity. More likely, it’s closer to $200,000 of equity. Most people would agree that rental property is different compared to your primary residence. So, after converting it into a rental property, do we now count the equity we’ve built up in that property?
If you include these two properties into the equation, suddenly, my net worth jumps from $500,000 to $850,000. That’s a pretty big jump without doing anything.
Do You Include Businesses In Your Net Worth?
Including the equity of a rental property in your net worth is essentially like including a business in your net worth. That leads me to another question – how do you think about businesses when it comes to your net worth?
This is a real question for my family. My wife owns her own practice and I own this blog. Both of these are real assets – they require work and they generate income that accounts for almost all of our household income. Most people wouldn’t include these sorts of businesses into their net worth. But why not? They’re real assets with real value. When we look at the net worth of the world’s richest people, almost all of it comes in the form of business equity.
My blog was built on sweat equity, so I don’t have any direct money tied up in it. And while it probably wouldn’t sell as easily as other businesses, it could likely be sold to someone for some amount of money.
Meanwhile, my wife bought her practice from a retiring dentist for a significant amount of money. She took out a 10-year loan to purchase the practice and is now 7 years away from paying it off. Because it’s a relatively short loan, it means she’s built up a decent amount of equity into her practice. She also has associate dentists that may want to buy into her practice one day. The practice has a real value that can be sold – and indeed, part of it may be sold one day if she takes on partners.
So should we count this in our net worth?
So Am I A Millionaire?
If you add in the value of our businesses, our household net worth jumps to over a million dollars. This is based on a simple calculation of what our assets are worth minus our liabilities. That’s a pretty big jump – going from half a million to a million just by including a few extra things.
So am I a millionaire at 34 years old? I’m not really sure. If you asked me, I’d say I’m not. At our current savings pace, I think we’ll get to “real” millionaire status by our early 40s. And this is without doing a lot – just earning a good income and putting as much money as we can into our retirement accounts.
But you can see what I mean about net worth and how it can be gamed to suit whatever you want it to say about yourself. I like to play it safe on the net worth front, so I usually only count my cash and my investments. Often, I don’t even count my cash when thinking about my net worth since I think of my cash as something I might spend soon. But if I’m feeling bad about myself, I can always say I’m a millionaire too just by counting other things that are more on the fence.
What’s Your Net Worth – You Can Decide
After writing this post, I see a few ways you can think about your net worth. These range from a more conservative view of net worth to a more aggressive view.
- Conservative. Only include immediately accessible assets. These include cash and taxable accounts. I think very few people will opt to think of their net worth in this manner, but if you do think of it this way, you’re going to feel broke, but you’ll also probably end up with more money than you know what to do with.
- Normal. Include all cash and investment accounts. I think this is how most people think of their net worth. They include their cash plus all taxable and tax-advantaged accounts. This is how I generally think of my net worth when I’m thinking about how I’m doing financially.
- Normal + Real Estate. If you want to inflate your net worth a little bit or want to feel a little better, include the equity you have in your real estate. You can get a general sense of what your home is worth from Zillow. As you can see from my own net worth, if you include these numbers, your net worth can jump dramatically. If you want to be more conservative in this area, maybe you only include the downpayment you put on your house. After all, that’s real money that was part of your net worth and didn’t just disappear.
- Normal + Real Estate + Businesses. If you really want to push your net worth higher, go ahead and add your businesses. Some businesses are more liquid than others. Brick and mortar businesses likely have inherent value. A website that generates income should have some value too. If you add your businesses into your net worth, you’ll probably feel really good about yourself.
If you’re feeling really bad about yourself after adding all of these things, go ahead and add the value of your cars, bikes, furniture, and everything else you have in your house. These are things with real value too. You probably even have insurance for them in the form of home insurance or renters insurance.
The point is, there are a lot of ways to think about net worth, and depending on what you decide to count or not count, your net worth can feel really low or really high. I didn’t even realize that I could technically be considered a millionaire until I wrote this post.
I want to be more conservative, so I go with the “normal” approach to net worth, which is counting my cash plus my investments. That means I still have a long way to go, which is fine with me. But if I want to feel good about myself, I can always add in my real estate and businesses. That’s the thing about net worth, I think. It’s really up to you to decide what it is.
Financial Samurai says
Conservative is probably best. However, depending on your net worth, it’s also good to have as accurate of net worth as possible for estate planning purposes.
I think it’s incredible when you can afford a $1 million plus property based on your current income. This is especially true given you didn’t have to sell your old home to come up with a down payment.
It helps put my situation in perspective, because I always feel like I need to invest more and make more to take care of my family. But maybe all of it is overrated, and I really don’t need as much as I think I do.
Have you shared before how much your wife makes? No worries if not. It would help paint or clear picture though.
No matter how hard I try, I have been unable to convince my wife to go back to work since 2015. Therefore, there is extra pressure on me to make sure our finances will survive.
Financial Panther says
Yeah, we are fortunate. I’ve never shared how much my wife makes because we’d rather not have that out there – actually haven’t really shared my own income or household income either. I really only share the gig economy income that I make each month.
As most people can probably imagine, a dentist/lawyer combo makes a really high household income. This obviously makes our finances much easier. Combine that with how frugal we’ve been over the past decade and money can really pile up. Just to give an example of how low our expenses generally have been, our mortgage for the past 5 years has been around $850 per month. In some places, people probably spend that much per month just on going out to eat or buying groceries.
My wife is the primary breadwinner in our family, so there’s pressure on her as well to earn. Since she owns her own practice though, it’s sort of a different pressure, if that makes sense.
Average Joe says
Panther, applying simple assets-liabilities, you are a millionaire. thats most accurate in my opinion.
Another question: how to account for taxes eventually owed on tax deferred accounts (401k, IRA, etc)
I use personal capital too. For me it’s more about keeping a watch on the direction rather than the actual number. It’s also more convenient than logging into multiple sites. I retired early around the same time as a blogger who frequently posts his numbers. His networth has gone up much more than mine, but I don’t care…he’s doing a lot of things differently than I. He “works” harder than I do. He invests more aggressively. I’m sure we will both be fine.
FWIW: I don’t include the equity of our nearly paid off house because I gotta live somewhere. I don’t really know how much it’s worth and have no plans to sell or take a loan against it. If the “value” suddenly doubled or dropped by 50% my life wouldn’t change. The remaining mortgage wouldn’t change either, so it’s value has no real meaning to me. Perhaps home equity has more meaning for those who have a large mortgage or plan to use its equity.
FI for the People says
Net-worth component parts is always an interesting issue for me. I use your “normal” approach. I don’t include my blog (probably because its worth is shy of about a dollar . . . if I’m being exceedingly generous). Nor do I include my business because as I’m the board, CEO, sole employee, janitor, HR/IT/Finance/Marketing department, etc., I probably couldn’t sell it even if I wanted to. As we no longer own any real estate, there’s no question as to whether or not to include it. I wouldn’t even bother trying to value and include the net worth of our tangible personal property. As for accounts, the only ones I’ve ever wavered on whether to include or not are the 529s for our kids. Hasn’t really been too much of an issue as I’ve always ended up on the side of not including them.
Accidentally Retired says
I love the breakdown here of the gameability of Net Worth!
And I largely get why many folks are more conservative and do not include their primary home, cash, or business.
But the fact is assets are assets. I personally like to break it all down, but then spit out the various liquidity of the assets. This includes my primary home and any business that I know a general reasonable value of. Like Sam said, I like to know what the entire picture is.
This way if things were dire, we could always sell our primary home, and rent. This would free up a large amount of cash that could be invested, or even lived off of if necessary. This would be a nightmare type scenario, but it is an option. And I like options!
All that said, I also track my “normal” net worth to really assess the viability of the 4% rule working for me. This is the practical, how long can my actual investments and cash last for me.
Anyways, you are doing great, and your business have real value. Maybe you don’t want to get your hopes up and I get that, but in the future they’ll come into play I am sure.
Mrs. FCB @financialchainbreakers says
Really great post. I totally agree with you. I track our net worth monthly, but solely as a way to track our progress and pat ourselves on the back, since sometimes random expenses can get so frustrating that we need a little encouragement. I don’t actually delude myself into thinking it means much, nor would I ever share it or brag about it. Because I know full well it doesn’t mean squat :). I do include rental real estate, but not the house we live in, because rentals truly are investment assets that could be completely cashed out. What’s funny is that, like you said, if I subtract the rental real estate and tax-advantaged retirement accounts — because none of these are particularly liquid at this point — our net worth is tiny! It’s still helpful to see the full picture though, keeping in mind that it’s a little misleading.
I feel that your net worth should only be calculated one way.
If you died today, what is the value of everything after it’s liquidated minus everything that is owed.
I feel that is your true wealth.
I think it is wrong to say that if you include house/business, then your net worth jumps dramatically. It is more like if you DON’T include them, you will have dramatic jumps.
The $200,000 that you did as a down payment for your house, for example, just poof disappears out of your net worth when you buy the house? No, you add the value of the asset and the liability of the mortgage to your accounting system on the same day, so your down payment remains represented as the difference between the two…the equity.
You should be periodically assessing how much your assets/businesses are worth and record appreciation/depreciation on a regular basis.
Hi, Kevin, I tried to open a service credit union account, but your link is to Starbucks, I left the comment in your blog with name of ” getting more from my emergency fund…..”, Maybe it is an old blog, so you did not know that, I sent comment here to bring it into your attention, could you please reply to that comment? Thank you
Impersonal Finances says
Gamifying the net worth is one of the motivating factors for me. A lot of people wrongly look at their 401k as something that takes money from their paycheck rather than adds value to their net worth. I use two different versions of my net worth–one on Mint that includes crytpo investments, vehicle, other possessions, and one on Personal Capital that only includes investment accounts.