Leland Gross (00:01.27)
Welcome back to another episode of What Works Wednesday. Today we're gonna be talking about an incredibly important and yet often overlooked piece of your personal finances and that's your net worth. Net worth is something that very few people actually track for themselves, but when we're serving our clients, when we're working with the people we get to serve, it's one of our most foundational pieces of information that we track for every single client. And today I wanna talk about what it is, why it's important,
how to calculate it, as well as how it allows you to make important decisions for yourself. So what your net worth is, I would say, it's your overall health score. It is the number that tells us actually how wealthy you are. You calculate it by saying, what is everything I own? Bank accounts, investment accounts, cars, jewelry, house, all of my assets, tangible and intangible.
And then what is everything I owe? My mortgage, my student loans, my credit card debt, car loans, and you subtract what you owe from what you own, and that gives you your net worth. So think about it this way, if you had to liquidate everything in your life, just sell it all, what would you be left with once you sold everything and paid off your debts? Another small example of this, just kind of a tangible piece would be
like home equity. It's like a small version of net worth. You have a home that's worth X, but you have a mortgage that's worth Y. And so if you sold the house and paid off the mortgage, what's left is your home equity. Net worth is like a large scale home equity of all of your stuff. And the reason it's important is because it actually tells us how financially healthy you are. Oftentimes people look at their investment accounts,
or their bank accounts or their income and say, I'm wealthy because of that. But if you have half a million dollars in your retirement account and that's all you have and you owe 700,000 and a small business loan, well, if you liquidated everything, you would be negative. You would have a negative net worth, meaning you'd be at zero and you'd still owe money. And so even though it looks in this one frame and picture of your finances, like you're really wealthy,
Leland Gross (02:29.45)
In that situation, you wouldn't be, because you'd actually have a negative net worth. And I see that all too often, where people are looking at one piece of their finances to tell them, I'm doing great, and not looking at the whole picture. And your net worth is really a whole picture of your finances that lets us know, how are you doing? How actually financially healthy are you? It's also really important, because it allows us to see trajectory.
Oftentimes, working with finances is not immediate gratification. It's more like steering a cruise ship. Little changes are going to make a big impact down the road. But day to day, we don't see a ton of change right off the bat. And so monitoring your net worth every three months, six months, every year allows us to see, are we trending in the right direction? Because sometimes having a negative net worth is really normal.
That's really common for people in their 20s because they're graduating college with student loans or getting a car note. They might be buying their first house. There's a lot of things when starting off that tend to put people at a negative net worth early on in their career. But we just wanna see, are we moving towards positive? Or if we're positive, are we growing? Is our net worth actually expanding? Or are we spinning our wheels in different areas and actually losing net worth? Or...
staying the same, staying kind of plateauing. So the way you calculate it, everything you owe minus everything you own, why it's important, it's a true picture of your financial health and how it helps us make decisions. So oftentimes people wonder, well, should I, I got this, we'll just say a tax refund or I have extra money in my budget. Should I pay off my debt or should I invest or save this money?
Basically, I have finite resources, I've got multiple desires, how do I split it up? What's the most impactful way to do that? And I'll caveat with that as a really nuanced situation that's really situation by situation. There's a lot of factors that go into that. But a way that Net Worth helps educate us on that decision is let's look at how these investments grow or your savings grow versus how your debt is growing.
Leland Gross (04:54.786)
So the interest rate on your student loans, the interest rate on your credit card, which one is higher? If you're gonna put your money into a high interest savings account and it's getting four and a half, 5%, that's great. But if your credit card's growing at 25%, that means your debt, what you owe, is growing faster than what you own. And so your net worth is still moving, trending negative, even though you put money into savings.
So in that situation, we might prioritize paying off your high interest debt because it's negatively impacting your net worth more than savings would positively impact it. Now again, that's nuanced. We need to make sure you have an emergency fund. There's a lot of conflicting tensions and needs in your financial plan, but your net worth really helps us understanding how different things will impact your net worth.
help us make some of these educated decisions to say, yeah, you're gonna be better served to invest this money, or you're gonna be better served to pay off this debt, or you're gonna be better served to keep this property, sell this property, rent this property, whatever it may be, whatever the question is, your net worth is a key indicator of, is this gonna grow my wealth faster than it's not? And with everything in my plan, am I continuing to trend positive, or is this gonna continue to make me trend negative?
So net worth is incredibly important. Again, you can calculate it with every little thing, which is your true net worth, your home, your car, your jewelry. Sometimes people will just do their investible net worth or liquid net worth, which is just the money. So, you know, bank accounts versus credit cards, things like that. There's other ways you can calculate that depending on what your goals are. But net worth is incredibly important. And I think everybody, when you ask them, should know a ballpark.
of what it is. It'll change day to day based on your spending, based on when you get paid, and little fluctuations. But to know how to have a general idea of, I'm in this realm, will really help you move the needle on your finances and really give you a lot of clarity that will then help you make really important financial decisions. All right. As always, if you need help, reach out, but otherwise have a wonderful week. Thanks for tuning into this episode of What Works Wednesday on the Self-Employment Success Podcast.