Now could be one of the most depressing times to be looking at your net worth,
given the current state of investable markets and the greater economy.
And while I haven’t paid too much mind to my net worth in the past,
I think it’s a great figure to track over time to monitor your financial growth.
If you’re interested in calculating and tracking your net worth,
we’re going to do exactly that in this video.
We’ll start with the simple formula for calculating your net worth,
and then I’ll walk you through the spreadsheet I’ve created to track it automatically over time.
I’ll also share a copy of this so you can use it to track your own if you’d like.
Then, we’ll take a look at the average net worth values by age and income
so we can see how we’re doing compared to the rest of the population.
Finally, we’ll go over some simple tips for increasing your net worth
and surpassing the metrics for your age or income bracket. Let’s take a look.
Calculating your net worth is pretty simple, as it’s just the value of what you own minus how
much money you owe. In more financial terms, it’s your assets minus your liabilities. Your assets
include cash and all of your liquid assets, such as investments. Investments can include stocks,
cryptocurrency and retirement accounts like 401ks and IRAs. You can also choose to include your car
or your home if you own one. You could, in theory, include other things of value too,
such as fine art or collectibles that are liquid enough to sell quickly if you needed to.
On the other side of things, your liabilities include any debts that you owe, such as student
loans, credit card debt, auto loans and the mortgage on your home if you have one.
And that’s it - once you’ve added up all the numbers, the difference between the two
is your net worth. An interesting thing to note here is that net worth calculations completely
ignore your income, which is a huge factor that we’ll talk more about later in the video.
There are a ton of net worth calculators out there if you want to quickly determine your current
net worth. But as I mentioned earlier, I want to track my net worth month-to-month and year-to-year
to get a visualization of my financial growth over time.
And to do this, I’ve created a spreadsheet where I can log all of my numbers and chart my progress.
I have 3 different components here. First, I have the assets section. Here, I’ve added up all of the
cash in my bank accounts. I added up all of my normal investing accounts for the stocks
section, and separated my retirement accounts into a different section which includes a Roth
IRA and my 401k. Then I added up the current value of my cryptocurrency investments,
and finally, looked up my car on Kelley Blue Book to get an estimate of its current value.
I don’t own a home, I rent, so that section is left at 0,
and I don’t think I have anything else worth adding up here for assets.
The next section is the liabilities calculator. I’m lucky enough that I don’t have student loans
and I always pay off my credit cards in full, so those are both at $0. Again, no home, so no
mortgage debt either. I have some personal loans taken out for investing, which for more context,
I have mostly sitting in cash so that I can put it into investments if the market gets really bad.
Some of it I have already invested, but in any case, this will offset some of the cash,
stock and cryptocurrency balances I have in the assets section.
I’ll talk more about this strategy in another video if anyone is interested.
I’ve also got my auto loan here, which cancels out some of the value of my vehicle since I don’t
own it in full. Finally, in my “other” section, I’ve taken out some loans against my Bitcoin,
so that’s where that value comes from. I’ve definitely come to regret these
because of how much the market has fallen, but if this is something you’re interested
in learning about I covered the strategy in a previous video.
After filling out both of these columns,
my spreadsheet calculates the totals and determines the resulting net worth.
With all of the numbers considered, I have a current net worth of just under $50,000.
So what I’ve done after this is create a table for logging all of my net worth calculations. I plan
to update this monthly, although you can come in here and do any frequency you feel like tracking.
By simply copy and pasting the monthly values of the asset, liability and net worth calculators,
the spreadsheet will graph the changes from month-to-month.
At first you’ll just have a single point on the graph, but after inputting data for additional
months you’ll see a nice line chart start to form. Instead of only tracking your net worth,
which is the line I have in blue, I am also charting asset and liability values because I
think that will also tell an interesting story. This is because, as we’ll talk about later,
you can increase your net worth by either increasing your assets OR decreasing your
liabilities, so I think it could be helpful to watch how both of these values change over time.
Again, there’s a link to this spreadsheet below if you want to use it for yourself.
If you want to gauge how your net worth stacks up against others,
one way to do it is by looking at the average and median net worth values for
different age groups. This data is collected and published by the federal reserve every 3 years,
with the last batch of data coming out in 2019. We are due another one for 2022,
but unfortunately, it won’t be released until 2023. So while this isn’t the freshest data we
have, it’s all we got to work with. Furthermore, the latest data from the St. Louis FED shows
that overall household net worth has increased quite a bit over the last three years, so the
numbers we’re about to look at from 2019 might indeed be a bit lower than they would be today.
Nonetheless, here’s how the 2019 FED data shakes out. Unfortunately, the youngest age group is 35
and below - so there’s a ton of wiggle room here for people in their 20s to catch up to
these metrics. The average net worth is about $76,000, with the median being about $14,000.
For those who haven’t been in school for a while and need a refresher,
the average is simply all of the data points added up and divided by the total number of data points,
while the median is the value if you sorted everything in a list and picked the absolute
middle. With these net worth metrics, all of the averages are way above the median values.
This shows that there is a huge spread of high net worth individuals that make the average look
higher than it actually is for the majority. So if you don’t reach that average net worth,
don’t be too concerned. The median shows the middle 50% of all the data,
so you know if you’re higher than that figure, you’re at least further along than 50% of people.
These numbers increase pretty aggressively towards the 35 to 44 age group,
with an average net worth around $436,000 and the median at $91,000. These numbers continue
increasing towards retirement age, where presumably having tax-sheltered retirement
accounts contribute a large amount to overall net worth. That is until you start withdrawing
from them to fund your lifestyle in retirement, where we finally see net worth start to decrease.
While looking at the data by age can be one indicator by which to compare
your financial health, it’s not the perfect indicator. Age only tells part of the story,
and it ignores the fact that net worth has huge disparities when considering race…
education level…. And home ownership. That’s why we need to add another metric into the mix.
And that metric is your income, which is probably one of the most important
indicators of what your net worth should realistically be. After all, your income
directly influences how many assets you can buy and how little you’ll be limited by debts.
For this, there’s a metric offered by the authors of The Millionaire Next Door.
The formula offers a target net worth based on your age and your income. It’s simply your age,
multiplied by your income, divided by 10. However, this formula has some shortcomings
because it doesn’t account for how long you have been saving, so younger people will have a
much higher target net worth than is feasible. This put my goal net worth at over $250,000,
which is 4 times higher than the average net worth of my age group. This formula ignores
the fact that I’ve only had a few short years to start saving and building my net worth.
So, there’s a better formula we can use that will give us a more accurate goal to work towards.
This formula tweaks the previous formula we looked at based on a few assumptions. One,
is that net worth is used to gauge your progress towards retirement. Once you reach a certain net
worth, you may be able to retire comfortably. So we’re going to anchor our calculations around the
retirement age of 65 years old. The second part of this is the amount of money you should have saved
at that age based on your income and lifestyle requirements. There are a ton of estimates out
there for this, but most suggest somewhere between 10 and 12 times your annual salary. We’re going to
go with 12 to buffer on the higher side of things - better to aim too high than not high enough.
So our new formula is crafted to give you 12 times your salary at the age of 65.
The formula is target net worth = your age,
minus 25, times your annual salary, all divided by 3 ⅓. We’re subtracting
25 from the age here because most people don’t start saving until their mid 20s, so this will
show younger people a more realistic target number to account for fewer years of saving.
Sure enough, if we plug 65 years old into this formula, we’ll get a net worth target of 12 times
our salary at any income level. If I plug in my current details, I get a target net worth of
about $31,000, which shows I’m actually on track for retirement at 65 with the savings goal we
identified. Furthermore, I can map out my target net worth rates for the future based on our age
and our estimated income level at those times - and again, all of these calculators are available
in the spreadsheet so that you can edit the values and determine what your net worth goals look like.
So by now, you should have an understanding of how to figure out and plan your net worth,
and increasing it is pretty simple based on the
input metrics. You either increase your assets or decrease your liabilities.
Increasing your assets means investing more, preferably in things like stocks,
crypto or retirement accounts that can grow over time even after you put money into it.
Decreasing liabilities means paying down debt, especially things like credit card debt and loans
that aren’t enabling you to acquire more assets - although generally,
it’s best to avoid taking on debt to acquire assets unless it’s something like a mortgage.
Ultimately, however, I think it’s important to remember that net worth is more of a vanity
number than anything. It’s a fun number to track and I think it can be helpful for charting your
financial growth over time. But, it ignores your income and monthly cash flow, which are really
important items to consider when you’re planning for a lifestyle where you don’t have to work.
I think tracking your net worth is best used as a progress indicator towards retirement,
assuming your plan is to retire at the average age of 65 with the recommended savings rate
of 12 times your salary. If your financial plan strays from the norm in any way,
you may need to use a more unique formula to plan for the future.
In any case, growing your income is going to be the fastest way to increase your net worth
because you’ll have more money to put towards accumulating assets and eliminating liabilities.
If you’re interested in doing that, check out this video to learn how I was able to double
my income from 2020 and 2021, which has been directly responsible for my net worth today.
Drop me a comment with any questions or requests, and I’ll see you next time.