This is a piece in a 8 part series on getting your financial house in order. Here are the rest of the posts. Please read them sequentially and hopefully it will help you on your path to financial independence.
- Setting up a budget/expense report: Ever wonder what should be included in a budget? We cover what you may want to consider. You can also sign up for our email list and download our free Budget crushing tool!
- Determining net worth: Do you know how to calculate your net worth? We discuss how to do it and if things like your home or cars should be included? Check it out to see what I do.
- Get you some insurance: Here we discuss what insurance you need for your family? Is an umbrella policy really necessary?
- Setting up a will or living trust and What to place in a living trust: How do you protect your family with a living trust? Why would you want one and how much will this cost? How do you do it? Check out these posts to figure it out.
- Max out the 401K, 403b, 457, or Government TSP: Ever wonder what these different accounts are? How much can you put into one versus the other? Is a Traditional or Roth plan right for you?
- Start an IRA: What is an IRA? Should you have one? How do you do a backdoor Roth?
- Pay down debt: As Dave Ramsey says, debt is bad. Still which debt should you pay down first and when can you consider paying down debt versus investing.
- Start tax advantaged accounts: Once you have done the above, what is the next thing to do with your money?
Net worth tracking
Today we discs something that is both boring and exciting at the same time. After reading all of these financial blogs, it’s obvious that in this community no one is comparing their new Audi or home size. In the world of personal finance blogs, personal net worth is the holy grail. It is discussed, celebrated, and analyzed though not in a negative way.
Net worth is a big part of the equation of whether or not you are on the road to financial freedom or financial disaster. An item we sometimes place (and celebrate) transparently for the world to see and in fact the net worth of most personal finance bloggers is displayed at Rockstar Finance. So today we are going to go over how to track net worth. Tracking net worth is similar to setting up a budget or an expense report as we discussed here. It is simple to do and important because it lets us build confidence.
Why net worth?
By knowing that we are gaining momentum, even if it is a little at a time, we grow comfortable in our plan and continue forward with our actions to find freedom. Many of us, don’t want to know our net worth because it can be shocking and depressing. For me, it is like the Big Mac. I do not want to look at the calorie count because I know its not good for me. (For the record, a Big Mac has 563 calories. A Starbucks Frappuccino has 410 calories, no thanks but I will take my Big Mac any day!)
I was the same way. I knew one day I would make a big doctor salary and all of my debt would disappear. Magically it would be gone. But unfortunately, that is not true. With the income came the lifestyle and so I had an intervention (a self mandated one) and take a good hard look at myself and my net worth.
My net worth
So where was I? Well my net worth had been growing over years, but negatively. I had taken loans for college and medical school. Then I deferred all of these loans through residency and fellowship. They grew slowly but surely. “Who needs to worry about debt when I was going to be a doctor!”, I used to say. So if school loans were not bad enough, I decided I can use credit cards and loans to finance my bachelor days. I wasn’t going to let being broke dissuade me in my 20’s from having fun and going out. It was a bad state to be in, but similar to a lot of my friends.
The calculations begin
Then in 2014, after I was married and finally making a doctor salary for 2 years, I realized I was not making the progress I wanted. I started to pay attention to my net worth.
So how did I do this?
- I put together an excel sheet and separated my debts from my assets (401K, IRA, etc.). As you can see below I had very few assets. My debts, however, were huge. I was able to calculate that my net worth was negative $253,000.
Here is my 2014 Net worth:
- I started the climb to a positive net worth (and am still climbing). I tracked my expenses and paid down small loans first and month by month I made progress.
Here is 2015:
- With each month my confidence grew and I knew we were on the right track.
Finally in August 2016 I briefly made it into the green, but for just one month. Then I bought a house and bam the networth dived again. This is why buying a home is rough .
From June 2014 to December 2016 my networth went from -$253,032 to -$15,435. A $237,597 gain in 2.5 years. Not too shabby! I think by the end of March 2017 I will be in the green again for the second time in my adult life. It just took me 36 years to get here.
You can calculate net worth too!
So how can you calculate your net worth? Get together an excel sheet and do the following:
- Start a liabilities colum. In this column place all of your loans. I also placed the interest rates for the loans so that I knew which debts were costing me the most. This area will include your home mortgage, auto loans, student loans, and any private loans you may have.
- Start an assets column. In this area include all retirement accounts (401Ks, IRAs, 403bs, etc.). Also include your children’s 529 plan (though some people leave this out of their asset column). Finally add your home’s value. I used the price I paid for the house, but others use the Zillow.com estimate, while others take 80% of the Zillow estimate. Either way works, just be consistent month to month.
- Start calculating your month to month gains or losses. It will give you a better idea of how your financial plan is going.
I challenge each of you to get out there and start calculating your net worth. See where you stand. Are you at the net worth that the Financial Samurai says you should be here. I am not. Per Sam, my Net Worth should be $1,000,000 at this time, but he does not account for the late start for most doctors.
Let me know how it goes. Are you surprised as to how much you are worth?
Also published on Medium.