Have you ever asked yourself that question? What’s your net worth? If you haven’t, then you probably should. Your net worth is a good way to tell if you are winning with your finances or not, and it’s kinda fun to do.
What is “Net Worth”?
Have you ever played organized sports? Baseball? Football? Basketball? Soccer? Something else? No matter what game you’re playing, there’s usually a score involved. That’s how everyone knows who is winning and who is losing. And make no mistake, the goal is to win. However, so many of us don’t have a goal for our finances, and as a consequence, we end up losing the game of money. We don’t know what the score is, and we don’t know what the goal is. It’s sad. It doesn’t have to be that way.
Your net worth is a financial calculation you can and should do annually to keep score on your finances. It takes your current assets (things you own) and subtracts your liabilities to give you your “net worth score”. Your assets are the things you own like cash, investments, cars, homes, boats, jewelry, and if you’re in the southern United States, probably a collection of guns. Your liabilities are your debts and money you owe. Subtracting your liabilities from your assets gives you your balance or net worth. If you are in heavy debt, it is quite possible to have a “negative net worth” meaning your finances are worth less than “0” and so is your net worth. While that sounds absolutely horrible, it’s better to know what the score is than to not know. Otherwise, you won’t know if you’re losing the game and what you need to change to “change the score”.
It’s important to check your net worth. I recommend calculating it and tracking it at least annually. This can help to hold you accountable on how you are handling your finances. It’s way too easy to make a lot of money and end up with very little progress by comparison to your net worth.
Way too many people make huge amounts of money and live the rich lifestyle, but never accumulate any wealth. Why? One of the reasons is they didn’t keep watch on their net worth. It doesn’t mean anything if you make a lot of money, but fail to manage it well. It doesn’t make a difference if you make $500,000 a year of $500,000 a month, if you don’t grow your net worth. I know it sounds crazy, but you can make $500,000 month or more and still have a net worth of $0 if you spend all your money and go into debt.
Knowing your net worth can give you a goal to aim at. Do you want to be a millionaire? Do you want to be a multimillionaire? How do you know how close you are to your goal? How do you know how far you are away from your goal? Knowing your net worth can inspire you to stay on track with your financial goals.
I really like this tool from CalcXML for calculating your net worth to help calculate your net worth.
Growing Your Net Worth
As you track and grow your net worth, it’s important you do the right things with your money. Just stuffing it into a savings account isn’t going to cut it. You need to look for good investments that help you grow your net worth. Rental property investments, mutual funds, well selected stock investments, and even small business opportunities like franchises can all be good ways to increase your net worth outside of the traditional J-O-B.
So many of us get stuck in the single mindset J-O-B. I’ve been fortunate to have awesome employment for over 20 years, but I still wish I had spent more time looking into developing multiple income streams. It’s only been in the last few years that I’ve begun developing multiple income streams. Traditional 401k investments have been in my toolbox for 17+ years. I began acquiring rental properties over the last 3 years. I wish I had started sooner. Now I’m looking at small business and other opportunities to grow my net worth.
$0 or Near $0 Net Worth
I have several family members that really don’t get finances and money. If fact, one of them has attended the same financial class 3 times over 15 years. That’s once every 5 years! Want to guess their net worth? -$50,000. Age 42. That’s a very bad situation to be in.
If you owe a ton of money on your house, it can take a huge chunk out of your net worth. Let’s say you have a $300,000 home, but you also owe $250,000. Your net worth is essentially $50,000. But wait, that’s not all. You owe $25,000 on a $30,000 car. You have $40,000 in student loans.
So now we have ($300,000 home + $30,000 car) minus ($250,000 house debt, $25,000 car debt, $40,000 student loan debt) for a net worth of $15,000. On the surface, this person could feel pretty good about their finances. They are living in a nice house, driving a nice car, and the student loan debts are under control. In reality, they’re very poor.
This is the reality for the average American.
Unless you have a number like net worth to keep score, it’s easy to think too broadly as “I’m poor”, “I’m doing okay”, or “I’m rich.” You can have a net worth of $30,000 or -$70,000, both are poor. It’s easy for someone who can pay all their monthly bills to think they are doing okay, but if their net worth is low, they’re really not doing okay. And some people even think they are rich because have a huge income and some nice toys, but their net worth could be $250,000. They’re not rich.
Net Worth Mindset
Developing a net worth mindset can help you keep your finances on track and headed in the right direction. It’s a simple way give you goal to help you cut out the waste. If you know you are shooting for a goal to become a millionaire that’s a net worth score of $1,000,000. It’s a lot easier to make good decisions with your finances. A good financial decision is one that gets your closer to your goal. A bad financial decision is one that keeps you from your goal.
Last night, our family went out to eat. I have 6 children. It’s expensive to eat out. It cost me $80 to eat cheeseburgers from Five Guys. On the way to Five Guys, my wife and I discussed that we can feed our family at home for $25. Eating at Five Guys did not help me build my net worth, but it sure was tasty.
Net Worth Target
I’m a believer that every American can become a millionaire, so your absolute minimum net worth goal is $1,000,000. I was a millionaire at age 40. Many people do it sooner than I did. I’ve met many people who become millionaires in their 20s and 30s.
As you get smarter and more confident in building your finances, your number should be higher. Since becoming a millionaire at 40, I now have aspirations of reaching the $10,000,000 mark and beyond.
Without being too scientific or getting caught up in the retirement planning game, set your net worth target between $1,000,000 and $10,000,000 to start. Sure some super aggressive types will want to set their goal higher. That’s okay, but the average everyday American can achieve a net worth target between $1,000,000 and $10,000,000 if they get serious about their finances now.
Make wise decisions with your money. Build your net worth. Build your wealth. Help others.
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