How To Calculate Your Net Worth & Why Does it Matter? Videos – Part 1&2
Video 1 Transcript
Kathy Fettke: Calculating Your Net Worth. What is your net worth? How do you calculate it? How do you grow it?
All right. Why bother? For many people, calculating your net worth can feel like this. It can feel like dieting, defeating like you can just never get there. I understand. It can feel like budgeting, just restrictive, and all the things you can’t do rather than the things that you really want to do. Like a partnership, it can be frustrating because you’ve got usually other people involved with your net worth. You have other people spending money. If you’re married or have children, other needs, so there’s a lot involved. Sometimes you just think, “Wouldn’t it be easier to ignore it?”
Well, here’s what most Americans are doing, just ignoring it. Here, we have a little graph of income versus net worth from 2007 to 2010. [00:01:35] This is a little outdated. It’s right in the middle of the Great Recession, but it does show us a picture. That is that in 2007, the average income in the US was $49,600. In 2010, it went down to 45,800. People were living on about $4,000 less per year. Which doesn’t sound like a lot, but it is. You know what $350 a month that is no longer there, so that can certainly have an impact on spending but look at this.
Net worth dropped from an average of $126,400 to– wow, almost half that, $77,300. That was a big hit. Now, net worth tends to be something that we’re not feeling in the moment, so this could be due to home equity. A lot of people were counting their home equity as part of their net worth.
When that disappeared, well, there goes that big chunk. If your money was in stocks, well, that took a big hit too, and many people felt that. Real estate investments, it was a tough time. We look at net worth as what we’re possibly going to be retiring on and $77,000 is just not going to do it, so yes, it feels better to ignore this problem. Now, Americans are ignoring a lot of problems. Two-thirds of Americans are overweight or obese. That’s an average of 23 pounds overweight is what obese is considered. The average American has nearly $16,000 in credit card debt. That’s about $3,200 in annual interest alone when you look at about 20%, which is about average for a credit card. They’re going up to as much as 29% and 30%. I don’t know how that’s legal, but that is a trap that’s very difficult to get out because to pay that off, it’s usually money you don’t have. You’d have to be making 20% on your investments to be able to outdo your credit card debt. Very, very difficult, but we have a big appetite here in the US.
That’s why I’m comparing weight with finances because they’re very, very similar. They go hand in hand. They both take the same kind of mental game, discipline, way of thinking to get ahead. Now, if you’ve ever seen anybody overweight lose weight and keep it off, it’s not because they did some kind of crash diet. It’s because they changed lifestyle. In order to change lifestyle, it’s got to be in a way that is something you can live with. Anyone can do a crash diet, and anyone can save and try to pay off credit card debt or stop spending for a short period of time, but that can all be undone very quickly with a lot of spending or a lot of eating. Again, this is about lifestyle change, and we’re going to be talking about that in a little bit.
Again, the average American net worth dropped 40% from 2007 to 2010. Now, hopefully, that has improved with the changing market, but I don’t know. How can we make this process fun because nobody likes talking about diets? Nobody likes talking about budgeting. Money is a tough and very personal subject, so let’s dive in.
Now, with dieting, if we can just shift our thinking about dieting to just simply tracking, not cutting out, but tracking what we’re doing, because when we can see what we’re doing, that’s when we can make change. A lot of times, a lot of the things that we do are unconscious. Certainly with food, if you start reading labels, you start learning, you start educating yourself, you’ll see that you can still eat very, very well just shifting to what you put in your mouth. Still stay full, still eat wonderful meals, just be more aware and educated. Suddenly, diet turns into not a negative thing, but a positive thing. Diet becomes something that fuels you. The food that you put in your body, that makes you healthy, that makes you feel good, that can be the new version of dieting. Not restriction, not giving up, but rather just, again, shifting lifestyle. The same concept.
I’m saying this right now because my husband and I are on a challenge. We’re on a what’s called the real– let’s see, oh my goodness, Whole Life Challenge is what it’s called.
We had to cut out alcohol, dairy, sugar, grains, grains of any kind, corn, soy for two months. When we first went to do this, I thought there’s no way I can do that. There’s no way I can cut out sugar, alcohol, dairy– that meant cheese. No way, but my husband showed me and helped me to see there’s a whole bunch of other things we can do. We can have sweet potatoes.
We can actually cook those in the oven with a little olive oil, and they taste like sweet potato fries with way less fat, and they’re delicious. We found out that you can cook kale chips in the oven. Kale, just put it in the oven, and it’s yummy, it’s tasty, it’s low fat, and very high in nutrition.
There’s so many good things we found out we could eat that I stopped thinking about what I couldn’t eat, and started thinking about all the wonderful new recipes I could learn. I also focused on my baggy pants. My pants that were getting looser every week. That has been the key to dieting is focusing on what you can do and not what you can’t.
Let’s apply that again to budgeting. Again, if we just look at budgeting as simply tracking not something that keeps us from doing what we want to do. We just simply want to initially– with a budget, understand where our money is coming from and where it’s going, so that we can be better stewards of it so that we can direct it better. There’s no judgment here, just tracking. Again, on my diet that we’re doing on this challenge, we track it all and we post it for others to see. In the beginning, it was really embarrassing. Well, in the beginning, it was not embarrassing because I was doing it right, but then when I started not doing it right, I didn’t want other people to know. We realized this isn’t about judgment, this is about simply recognizing our patterns.
Again, with budgeting, this is the first place to start is just recognizing our patterns. Again, with net worth, we’ve got to remember this is not a good thing, it’s not a bad thing, it’s just a number. It’s just a measurement. When you’re feeling bad about anything, it’s a good time to start comparing. Here in the US and in the modern world, we are so, so wealthy. Even the poorest of us here are some of the wealthiest in the world.
There’s a saying that Warren Buffett has– A friend of mine had dinner with Warren Buffett and he mentioned this then, and she was blown away. She told me and I thought it was brilliant too. Some of the sales people and staff within Warren Buffett’s company were complaining that sales were way down and during the recession, their salaries were cut in half and there were “struggling.” Warren Buffett said to them “Well, I’ll tell you what, let’s have every person in the world put a ticket into a big barrel. Every human being has one ticket and they put that ticket in a barrel and that barrel stirred up. You can go in pick out a ticket and you can trade your position with anyone else’s position in the world by just picking another ticket. Well, when you find out that most US citizens are in the 1%– we talk about this 1% in the US, the fact is most of us in the US are the 1% of the world.
If you trade your ticket in and take someone else’s, there’s a very good chance, a 99% chance that you will end up worse off. We’ve got to put things in perspective when it comes to net worth. We have clean water, we have usually a warm and safe place for our children to sleep, we have schools, we have so much here.
When we come back to net worth, let’s just take away the guilt, or the concern, or the fear and say, “We’ve got it pretty good.” When we look at our net worth, we’re just taking a snapshot of where we are financially and that’s it. I can tell you– financially, we are far better than most of the world.
When we focus on the good stuff it all becomes easier. This is going to be the key when building your net worth. Focus on what you can do. Focus on the exciting goal in the end like I said, baggy jeans or tight jeans just a smaller size. What is the exciting goal? What do you want to achieve? What kind of net worth do you want? Take a moment to think about that. What would be a net worth that would have you feel very, very good? Very secure? Is it a million dollars? Is it $500,000? Is it $10 million? Is that $100 million? What is it for you? It’s different for everybody.
Again, I’ll tell you the 99% all those other tickets in that barrel, they might be thrilled with a thousand dollars, $100 or $10,000, that would be the jackpot. $100,000 dollars would be multi-millionaire status. Again, it’s just very subjective. What for you would be a very comfortable net worth, and just whatever number comes up, write it down.
We’re going to go in a little further about what that means, and why we care about having a large or small number. Again, coming back to why does any of this matter, you could have a $300,000 net worth and be happier than the person with the $3 million net worth. If you’re honoring your values, if you’re living life the way you want to on your terms, and it’s never about the numbers. It’s about what you do with them, it’s about really the numbers that happen between 12:00 AM and 12:00 AM, so day to day, those numbers are the most important. Your time is limited, money is not, your time is. That is the greatest value of all. What you do with your time is what matters. Again, that it takes the pressure off of having to have this big net worth.
Video 2 Transcript
Kathy Fettke: When we’re calculating assets, you look at, first, cash. What’s the cash on hand, in your pocket, at home, under your mattress, hopefully, not too much. In your checking account, your savings, money market, cash value of life insurance, or any other cash. Maybe you got some silver, some gold coins. That’s the real money. Where do you have that stashed. Just take note of all that. Cash would be on the assets side.
Real estate, also on the asset side of your net worth, be your primary residence, any vacation home, investment property, land partnerships, anything else. Any tipis, igloos, it’s your real estate.
Investments- certificates of deposits, stocks, bonds, mutual funds, annuities, IRAS, 401(k)s, 403(b)s, 457 plans. Rothe, pension plans, anything else, that would be considered an investment.
Personal property- automobiles, recreational vehicles, home furnishings, appliances, furniture, collections, jewelry, gold, silver, all your personal property. Add that up to your asset side. Maybe your personal property maybe looks inexpensive. Here’s your couch and here’s your car. Doesn’t matter, as long as you’re happy. Calculate the value of these things.
Alright, liabilities, this is on the other side. Got your assets, you’ve got your liabilities. These are your debts, this is what you owe on those assets that you have basically. Hopefully, they’re assets, hopefully you don’t owe on a bunch of stuff that has no value. Alright, household, medical, credit cards, department store cards, back taxes, legal, and anything else on your debt side. Of course, mortgages, this will be on the real estate, any debt you have against your real estate assets, your primary residence, your vacational home investment property, land partnership, other. Of course, any other loans you might have, bank, auto, recreational vehicles, education. Those college loans, boy, we know about those.
Life insurance, personal and other. There we are.
Your net worth is simply this equation. Your assets minus your liabilities, that equals your net worth. That’s not so hard, right? Okay, so we’re going to come and look at this. [00:03:00] The net worth tracker. Again, the net worth is the value of a person’s assets minus their liabilities. Now, you might not want to do it every month, that might be overkill, but I really recommend doing this about every quarter, certainly, every year.
Time goes quickly. As I said, it’s your greatest asset, so please, use your time wisely, too bad there’s no place to put it on here, but that would be, on a different page which would be how do I want to spend my time ideally? We will send you this spreadsheet and you could fill it out. My husband and I do this every new year as a check-in, as a snapshot of where we are and how things might have changed. It tells a story. Again, you just see in January. This is an example of checking account, the cash on hand, the savings, 401(k)s, IRAS, primary residence, total assets.
Then of course, liabilities down here, we got a $152,000 loan, student loans, car loans, total liabilities. Oh-oh. We’re in the negative. We’re spending a little more than we have coming in and that’s tough. Boy, this is a great snapshot because we can say, “Oh-oh, now I know why I’m using my credit cards and this is why.” What can I do to change this? What can I do to turn this around? Well, here’s what they did. Checking account, they put a little more cash away. They spent less, $250 less so that put more in their checking account.
Savings, put a little bit more away in savings, a little bit more in the 401(k). The IRA didn’t do it on this one and the house is the same. Now, maybe that house went up in value, I’ll tell you what, right now, the way real estate is, is very possible that house went up in value in one month, but let’s just not assume that. Also, I don’t really like using the primary residence as part of your net worth because if you’re planning on living there, you’re not cashing that in, doesn’t really necessarily apply, but we have it here anyway. It would only come in handy if you were planning to sell, that’s when you cash it in.
Here now, the mortgage did pay down a little, the student loan paid down a tiny bit, a car loan, a little bit, and the credit card, look at that. This person put a little bit more in savings, didn’t spend quite as much, paid off some debt and voila, look at that. We now have a positive net worth and the change here is positive, $1,900 difference and a positive net worth.
Now, this is fun to play with because if these numbers were very, very different, and let’s say there was, let’s add some zeros here for the fun of it. We’re going to come in here and add zero or maybe– Yes, we’ll do that. They have $80,000 in savings, let’s see what happens here now the net worth just went up, that’s nice. Let’s say that an investment property was purchased and let’s just say that $100,000 property and let’s say Dallas or Atlanta or something like that. They had to put $20,000 down, so we’ll just come back here and do, they still have this money in their account. They took out of their savings, they have to put $20,000 down, so now they have $60,000 in their savings.
They still have the– I’m going to say that they contributed a little. Let’s say they’re up to $5,000 now. IRAS, for some reason, we’re not contributing here. I don’t know why. Maybe the IRA result other investments. $500. What’s going on down here and primary residence is has gone up to $166,000 [chuckles]. Now we have other real estate, now we have $100,000 property. Now, we’ve got a couple of mortgages, we’ve got this one and it looks like they paid off about $300, so we’re going to say $400. Student loans, doggone, those are hard to pay off. There we go, I’d pay a little more. Well, it depends on the interest rate, if it’s low-interest rate, I’d take my time. Car loan, that’s a high-interest rate, let’s pay it down faster, but there we go. Credit Card, Ooh, don’t like those, let’s pay it down to $2,000.
Interesting here, we’ve got the other real estate. We’ve increased our net worth from paying some of that stuff down too. Imagine it’s a year from now and that real estate has gone up in value, and the mortgages have gone down. Now, we’re going to see, obviously, a really nice increase in the net worth here, and that is the name of the game. Of course, if the opposite happened, and those values went down, we would see what we saw over the last six years, which was net worth being cut in half. Fortunately, it appears that we are on the side of the cycle where prices are going up. I’m going to assume that in one year, that it’s maybe gone up, let’s just say 6%.
Now pretend this is a year. This is a year, it’s not April, but now this is $106,000. This is going to be another $176,000, but we’re going to still have this cash here, unless we bought more property, but we’ve paid down these loans. Again, this is one of those ways that you can really accelerate the growth of your net worth, which is acquiring assets and paying down liabilities.
You might be saying, “Why shouldn’t this person just take this $60 grand and pay off the credit card debt?” Let’s say they have more credit card debt and it’s a 20%, most people will say, “Oh, my goodness, pay it down.” Let’s say they had $20,000 in credit card debt and somebody, I hope not, I hope not, but somebody might say, “Oh, would be better taking another $20,000 from here and buying a property or taking that $20,000 and paying off the debt.” Well, it depends. Let’s say that there was some really good cash flow coming from the assets, coming from this real estate. Let’s say it’s $500 a month because we’ve got two investment properties that we bought in a down market where rents are high and mortgage payments are low and we are able to cash flow. That is $500 that we can be paying down the credit card, we’re building assets but paying down the debt with the cash flow.
That, in my opinion, is a much better plan than just taking the cash and buying and paying down the debt. I would rather see money go into buying assets. Assets create income that pay down the debt. Okay.
There’s all kinds of things you can do with the spreadsheet, you can play around and see where the best place to put your money is, we will send it to you. I also highly recommend that you get familiar with Quicken or Quick Books and learn how to work with your net worth on those because it’s just all automated, it’s wonderful. I can find out with a click of a button what I’ve spent on groceries, what I’ve spent on travel, what I spent on vacations, on children stuff, on clothing, food, gas.
It even helps me further understand where my money’s going, where I might be able to be cutting back and where I might be focusing. Now, like we talked about earlier, when we focus on what we can’t have, it’s awful, painful, no one likes doing it. We are creatures of pleasure, we don’t like paying, for the most part. When we’re looking at these things and we say, “Uh, we’re focused on this credit card debt, that is no fun.” When we are buying assets and saying, “Okay, these assets are going to pay off this debt. Oh, my goodness, in this month, it’s going to be paid off because of the cash generated from these assets,” now, that’s exciting.
Or we might say, “Wow, we’ve been spending an awful lot of money on food. Maybe we’re going out too much. What would be a fun way to spend less on food?” Maybe the family cooks together or the kids pitch in or everybody’s responsible for a different meal one night of the week. Whoever can do it the cheapest wins, I don’t know. Have it be fun. Vacations, when my husband and I were saving for investment properties, we weren’t going to Hawaii.
Do you know where we were going? We were going to this little lake in northern California, I don’t even know the name of it, but it’s free camping. We would bring all our friends and we would go camp at this lake and we would bring boats and toys and kayaks and we would have the time of our lives camping for free by this lake and saving lots of money.
Again, it doesn’t have to feel like taking away from your joy and your pleasure. It’s just different. It just changes and I’ll tell you, now we do take the kids to Hawaii. Do you know the vacations that they remember the most? Are those camping ones. Don’t underestimate how much fun you can have on a lower budget just by shifting things around. All right, well, I hope this was helpful, everyone. Take care and we’ll see you on the next one.