The Personal Finance Podcast - How and Why You Should Track Your Net Worth (Plus The Exact Net Worth Tracking Tool I Use to Make it Effortless!)

Episode Date: April 14, 2021

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On this episode of the personal finance podcast, we're going to talk about how you can track your net worth. What's up, everybody, and welcome to the personal finance podcast. I'm your host and the founder of dollar after dollar.com. And today on the personal finance podcast, we're going to be talking about one of the most important things in your personal finances. And it's how to calculate your net worth. If you have any questions at all about this episode, hit me up on Instagram.

at dollar a F-T-R dollar. You can hit me up with a DM, you can leave a question in the comments, whatever you want there. And if you are listening to this podcast and getting value out of this podcast, leave me a five-star review on Apple Podcasts. I don't ask for that enough,

but that really helps the show out. Now, if you've never calculated your net worth before, it's an extremely important metric to understand. Because what your net worth is, It's actually the scorecard that you're going to be utilizing that allows you to understand exactly where you are with your money. Because a lot of people think they're in a much better financial situation than they are. And then all of a sudden they start tracking their net worth and they're like, oh, shoot, I need to really get my financial situation in order. And what the net worth does is it motivates you to grow it.

And it's extremely, extremely important for every single person who wants to build wealth to track. It's where you stand financially. it's indicative of where your financial position is and how much money you make and how much money you keep now calculating your net worth is extremely simple process it's extremely simple math you just need to have some accurate information that's going to allow you to figure out your net worth number and to put it simply your net worth is just your assets minus your liabilities it's what you own minus what you owe and the ultimate goal here the ultimate goal for all of us as we're building wealth is to increase our net worth because as our assets rise, then obviously our wealth is

rising. Your net worth is your wealth number. So let's get into how to track your net worth. So the first thing that you want to do is you want to list your assets and their value. Now, a lot of people get confused on what an asset is when you're tracking your net worth because the old school way is they would add a lot of things into their assets that truly aren't real assets. So the only the things that go up in value or generate income should be what you consider an asset. So here's what you can include, things like your cash and your savings account or your checking account. Businesses, your house, the equity in your house, not just your entire house, but the equity in your house, rental properties, rental income, stocks, bonds, cryptocurrency,

gold, silver, commodities, websites, things like that is what you can include on your asset side. What not to include on your asset side are things like cars, furniture, clothes, boats, RVs, ATVs, appliances. Now a lot of people will include things like fine art, jewelry, diamonds, things like that. You can include stuff like that if you want to. I don't personally include that stuff. I only want to include assets, things I know are going to generate income or increase in value. Because I think it's unnecessarily fluffing your net worth by adding those other items. Now, one that people have a difficult time figuring out is typically their house.

On your house side, you can find estimates online to figure out what you think your house is worth roughly. And then look at what a couple of houses in your neighborhood sold that are maybe the same size and same comparables. And you could look and see, okay, this is how much my house is worth, how much is left in my loan, and then subtract the difference. So what you have left, say your house is worth $500,000 and you have a $300,000 loan, you could add $200,000 to your net worth with that equity in there.

Now, some people may argue that your house is not an asset. That's a classic rich dad, poor dad argument. And I can agree with both sides, actually. But if you want to include your house, then absolutely do it. If you don't want to include your house because you don't think it's an asset and you agree with the rich dad poor dad side, then absolutely you don't have to include that either. You can go either way on this. The next step, list your debts and the amounts in order.

So you want to add things like your mortgage, car loans, credit cards, student loans. loans. Any other kind of loan or debt is a liability, and it's something that you want to actually include because you're going to subtract it from your assets. Any liability that you have is going to be subtracted from your assets. Step three, you're going to subtract those liabilities from your assets. So let me give you an example. Let's say we have a friend named Pablo. And here's Pablo's assets. He has a house that's worth $220,000. He's got a checking account worth $1,500. He's got a savings account with $5,000 in it. He's got a 401k that's worth $45,000.

He's got an IRA that's got $15,000. And he's got $8,000 worth of Bitcoin. So his total assets are $294,500. But then we've got to look at his liabilities. So he's got an $180,000 mortgage. He's got $10,000 in student loans. He's got $4,000 car loan, $2,000 in credit card debt. So his total liabilities are $196,000.

So you take his assets, $294,000. $9,500 and subtract it from his liabilities, $196,000. And that's where you get $98,500. Now, all of this kind of sounds like it's a pain in the butt to have to track. And you can absolutely track your net worth on something like a spreadsheet or Google Sheets. And a lot of people do that. And it would take you like 10 minutes a month for the upkeep. But I know how all of you are psychologically, because this is exactly how I am,

you're not going to open up that spreadsheet every single month to update it. Or if you really truly need the motivation financially, you want to have that motivation every single day. This is where the app that I talk about all the time comes in and it's absolutely free. Personal Capital comes into play. Because personal capital has a free net worth tracker. And it's the coolest thing in the world. So all you do is you enter in all your bank accounts and things like that. It syncs them all up.

And you can enter in like your mortgage and it'll sync up your liabilities as well. Your credit card debt, all that stuff. and it will tell you your net worth in real time at all times. So all you do is have to set up personal capital once. And again, it's completely free. And then after that, it will sink all of your accounts and it will track your net worth for you. It is the coolest thing in the world. And it's one of the best things.

I've been using personal capital for years for this reason. It's to track my net worth. It's to see my cash flow and track my net worth. It's extremely important to have this app. I'm telling you guys right now, it's the best net worth tracker that's even remotely out there. I'm going to leave a link to it in the show notes if you guys want to take a look at personal capital, but it's by far the best net worth tracker that's out there. And everyone that I've ever talked to agrees as well.

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Find your advisor at IGPrivatewealth.com. So the first reason why you should track your net worth is it's a fantastic indication of your overall financial health. Your net worth might be your most important number that you need to be tracking because it's a big picture of everything where you are financially, how your wealth is building and where you are with your wealth building. Because if you look only at your assets, it's going to make you feel good inside and warm and fuzzy, but it's not giving you the true picture because your liabilities are holding you down in the long haul. So your net worth just puts your perspective into place. And what happens with a lot of people

when they start tracking their net worth, is they start to see their assets and liabilities and say, shoot, I'm in a situation that I don't want to be in. Maybe your net worth is negative, which is a lot of people out there. A lot of people have a negative net worth, which is a lower net worth than a newborn baby that was born yesterday.

Put that into your head. At the same time, that means that they have more debt than they do in their savings. And that happens all the time. So if you see that you're in that situation, if you pull out personal capital, you put in all your assets and all your liabilities, make it's your goal to pull yourself out of that situation.

Make it your goal to bring your net worth up. And look at your net worth every day. Use it as a motivation. Because if you use your net worth at a motivation as a fire in your gut to allow you to actually pay down your debt, to start saving money, to start investing money for your future and your family, that is what's going to propel you to the next level. And that's why it's so important to do this.

Number two, it's a more important measurement than income. So we all know that a lot of people out there, may make a lot of money, but making a lot of money doesn't mean you're wealthy. Making a lot of money and keeping a lot of that money means that you're building wealth. But if you make a lot of money and spend all your money, you're no more wealthy than any other person out there. And that's what the important thing is. You see all these stories of doctors who just spend all their money on Ferraris and Lamborghinis

and never actually save anything. And the reason why that is is because they don't understand their net worth. And understanding your net worth would really put pause on you doing this. that because you're making all this money and what is it doing for you it just means that you have to keep working more hours to obtain more money so that you can attain more stuff to fill up in your house that you're not even going to use and that's why it's a much more important metric than income because your net worth is your scorecard your net worth is telling you this is how you're doing and you either need to step it up or you're on the right path and you're making

progress which takes us into the third reason because it provides a measurement for your progress. Like they said before, if you calculate your net worth, it can serve as an excellent motivation. Fantastic motivation. It's one of the best motivators there is in personal finance. And if you set up net worth goals, which a lot of people do, you can set up a goal and say, hey, I want to have a million dollar net worth by the time I'm 45. That's a very obtainable goal for someone who is, say, 22. And you can do that by investing small amounts of money towards your future. But setting up realistic net worth goals allows you to take that measurement and motivate you to the next level. And here's the thing I find when I teach people how to start tracking their net worth.

When I coach people on how they need to start tracking your net worth, all of a sudden I find that they have a lot more money than they did before once they start tracking it. The reason why is they're looking at their scorecard and they're understanding, hey, I need to be buying more assets to increase my net worth and reducing my liabilities. That's the most important thing in personal finance. Personal finance is very simple on paper, but it's very hard to execute because it's all psychology. And so if you understand this, the net worth statement will change that for you. Number four, net worth emphasizes the importance of your investment.

It's always super nice when I open up personal capital and I see a massive increase to my net worth because the market had a huge day that day. And what that means is the more money that you have invested, the more you can start compounding your money. money. And the more your money starts working for you. And all of a sudden, all of these dollars that you invested years ago are running the rat race for you. And eventually, once you have enough of those dollars, you don't have to work anymore. You have financial freedom and your net worth will show you this power. It'll show you the power of your investments and how your investments can actually create freedom for you. It's absolutely unbelievable. And as you watch these numbers tick up and you say, hey, maybe your net worth goal is to get to your first $100,000. Our very first episode of this podcast was how to get to your first $100,000.

The reason why is compound interest starts working for you in magnificent ways once you surpass $100,000. The first $100,000 is a pain in the butt. But after you get to $100,000, all of a sudden the snowball starts growing. The compound interest starts pumping out cash and you are able to watch your money grow. So maybe that's your net worth goal. Boom, you hit $100,000 and all of sudden you start to see compound interest working. It's working for you and it's starting to grow. And that is why the statement is so important because it emphasizes the importance of your investments. It allows you to see the importance of your investments and why you need to absolutely track your network. And if you're trying to figure out, hey, what order do I invest? What order should I put my

money in to these different categories? Listen to the last episode. We talked about the stairway to wealth. And that tells you the exact order of where to put your money. The fifth reason you should track your net worth. It provides the motivation to eliminate debt. Now, this is absolutely a fantastic reason to start tracking your net worth, especially if you have a significant amount of debt, you're going to say, oh, my goodness, I'm worth barely anything, or I have a negative net worth. What's a bigger motivator than looking at a screen that says you have a negative net worth? If I saw that, I would kick my butt into gear. You know why? Because I know I'm behind the eight ball on building wealth, and I need to get to the point where I can start building true wealth. And having a net worth, you will never build true

wealth having a net worth. You have to get yourself out of that situation. Now, I know it's a very hard thing to do. That's a very hard thing to execute, a very easy thing to say. But if you can do it, if you can get yourself to a positive net worth, you will be amazed at how much your money will start growing once you start investing. You'll be absolutely amazed. And you'll be saying, I wish I did this sooner. Now, in a lot of situations, you may have taken on debt because you had no choice. you had to go to college and you had no other choice, you had no money to go to college. That's absolutely fine. You can forgive yourself for that.

Don't beat yourself up for that. But at the same time, use your net worth statement as a motivation, a motivator to allow you to get to the next level so that you can actually pursue true wealth. The sixth reason, when you use your net worth, it results in better use of your money. Meaning when you're tracking your net worth, all of a sudden you're motivated to actually put your money in the right places, to spend less, to save more, to increase your income because you want to watch that number grow. And it's really great way to track and motivate you going forward. Number seven, it shows the true impact of your financial decisions. So every time, say, you take out a loan, let's say, for example, you have a car

that's free and clear. And every time you take out a car loan, let's say you buy a $30,000 car. Boom, your net worth just dropped $30,000. Now, when you see how long it takes to save $30,000, especially when you're first starting out and not making a lot of money, when you see how long it takes to save that first $30,000 and then boom, you drop your net worth $30,000 just by buying a single car, that's going to change your buying decisions significantly. We live in an epidemic right now where all of a sudden people who make $30,000 a year are buying $60,000 cars. Credit has made people lose common sense.

And so what's happening is if you track your net worth, you're not going to lose common sense because you're actually going to see the real impact that that makes on your money. Number eight, your net worth can actually help you with getting a loan. So a lot of times, especially in real estate, when I'm trying to put together real estate deals, I love to show people the net worth statement because it allows you to get very creative loans. And a lot of times, if you want to work with private equity or things like that, your net worth statement's going to significantly help you if you want to be an accredited investor or all kinds of different situations, your net worth helps you get loans.

It helps you invest in various things. it's very important to have and to continue to track. And then the last reason, number nine, is it makes it easy to visualize your progress over time. There was a blog I used to read all the time, and I had an article, a guest post article on there a long time ago called Budgets Are Sexy. And every month, the writer at Budgets Are Sexy,

I think he sold it, somebody else owns it now, but every single month, he would track his net worth. And it was fascinating to watch because it made it easy to visualize your progress over time. So you could look at his entire progress of his net worth and see how it grew. I think he started like the first one he had like $100,000 in his net worth. And it was well over a million by the time he sold the website. That was so, it was so cool to watch because it was like within seven, eight, nine, ten years.

Boom, he's a millionaire. And it's watching the progress over time. And you could see how impactful tracking your net worth was. And he would talk about the decisions he would make. Hey, I'm paying down debt here so I can increase my net worth a little bit more. I'm paying off loans here so I can just increase my net worth a little bit more. I'm saving extra money this month. I'm actually going to do a savings challenge so that I can increase my net worth even more.

And making all those small decisions led to becoming a millionaire. So shout out to Jay Money. That was really cool when he used to track his network. I'll see if it's still on the website. I'll leave a link to it in the show notes. Those are nine reasons that you need to be tracking your network. If that's not going to convince you, I don't know what will. Because tracking your net worth is so extremely important for your wealth building in the future.

check out personal capital i'll leave a link to it in the show notes and if you guys have any questions reach out on instagram at dollar a f t r dollar leave a five-star review on apple podcast and thank you so much for listening we'll see you on the next episode thank you guys so much for listening and if this is your first time listening consider subscribing so you never miss an episode and share this episode with a friend and don't forget to leave a rating and review on iTunes as well because Because our goal is to bring as much value to you as possible. And we're trying to spread this message that money can buy freedom. That's what money is there to do is to buy more freedom.

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