Calculating Your Net Worth
The calculation is straightforward.
First, total your assets. Cash and investments accounts have a clear value. However, valuing real estate or businesses is more nuanced. I’d suggest being conservative with both.
You could use the low end of the Zillow Zestimate for your home. And if you own a business and haven’t done a valuation, you could use a conservative estimate of a multiple of revenue. The key is to be consistent over time.
I typically wouldn’t include personal assets, like a car, unless it was a collectible.
Then total your debts. Mortgages, business loans, student loans, credit cards, and auto loans are the most common.
Subtract your debts from your assets to get your net worth.
Tracking Your Net Worth
Now do this at least once a year to see your progress. Your net worth could vary over time.
You can do this with a personal balance sheet or use a digital tool. There are many online resources. All our clients have access to www.investor360.com, which has a simple way to digitally view all of your assets and track your net worth.
Putting your Net Worth in Context
To make net worth more meaningful, think of it in terms of personal spending.
A net worth of $ 1 million doesn’t mean a whole lot unless we have context. If a teacher had this net worth, we’d think she would be doing well. But if a professional athlete had this net worth, we might think he has a spending problem.
Age matters too.
The calculation is to divide your net worth by your annual spending to get a ratio. If you spend $75,000 per year then divide that by $1 million, you get 13.3.
This is the number of years your net worth can support your spending.
Now we have a way to measure financial freedom.
It’s crucial to keep track over increases in spending and net worth. Growth in both could mean you’re treading water. A spending cut will show up in the calculation, showing you how much closer you are to financial freedom.
Tax Shredding Event
We are hosting our annual Tax Shredding Event at Odd Muse Brewing Company, 4488 Spring Valley Road, Farmers Branch, TX. We’d love for you to join us for this come and go event. We’ll have beer, BBQ and a giant shredding truck for your tax documents.
Anyone is welcome, we just ask that you register so we have enough food and beverages.
Here are the details:
Tuesday, November 2
Odd Muse Brewing Company
4488 Spring Valley Road
Farmers Branch, TX
Andrew Eppes, RICP®