Take Your Net Worth to the Next Level

In order to improve your financial situation, it is helpful to understand where you are today. That is what your net worth can help you identify.

In this episode I cover:

• Defining net worth
• Calculating net worth
• Types of assets
• Bad Debt vs. Good Debt
• Keeping perspective when analyzing your net worth

YouTube Video

Transcript

Copy Transcript Copied

SPEAKER_00 0:00

But I d I don't have things I can show off because uh you're not usually posting your savings account balance, your uh investment account balance, and things like that. That's not stuff that people normal people talk about. I would say, this is techie personal finance bootcamp where I help tech professionals in their 20s and 30s built a great life scale without sacrificing their future possibilities. I'm your host, Lucas Casares, certified financial planner and founder of Level Up Financial Planning, where I help educate, coach, and build strategies with my clients to help them take their financial confidence to the next level. Here's an important compliance disclosure. This podcast is for informational purposes only and are not to be considered recommendations. It is recommended you consult your trusted financial professional before implementing any information obtained from the Techie Personal Finance Boot Camp. Today I'm excited. So this is season 1.5. We're in between season one and season two. And the reason for that is because I want to help anyone who's currently subscribed and anyone that's gonna be listening to these podcasts right at the beginning of the new year for 2020. I want you to have the confidence to kind of dive right in and start to increase your financial confidence, your financial literacy for 2020 to make it the best year possible. And so we're gonna be starting out with how to take your net worth to the next level. We'll be talking about how to take your cash flow to the next level, and then how to build your wealth in 2020, as well as dominating your debt in 2020. So hopefully with those kind of four videos and podcasts, you're gonna be able to start the new year outright and very confident in any direction that you want your 2020 goals to go. Just so you're aware, I actually created a quick little slideshow to accompany the podcast. So if you're a visual person, definitely go and check that out. There'll be a link to the YouTube video that you can find and watch this rather than listen only. To get started, like what is your net worth? So, as you can imagine, it's basically what's your worth on paper, and it kind of looks at all of your financial situation. So it's gonna be the calculation of your assets minus your liabilities. And a lot of times you'll see this on a spreadsheet or just kind of written on paper. So assets tend to go on the left, liabilities go on the right, so it's very easy as you add up all the different assets to subtract that from all the liabilities that add up. So if that's a positive number, then you have a positive net worth. If it's a negative number, don't worry about it, don't let it kind of bring you down. Uh actually, a majority of my new clients have negative net worths, and it's pretty common because of things like student loans and just being early in your career, trying to establish good financial habits and start to build up wealth and assets that can actually start to put your positive net worth in a good direction, uh, put it in that positive side. And so that's usually a big goal of a lot of my clients early on is all right, let's let's get this thing positive. A lot of times people call that being in the black instead of being in the red. So uh your net worth is important for a few different reasons, but I think overall it just kind of acts as a report card for building wealth. So there's credit scores, and that's not one I'm gonna record a video or podcast on, but I have recorded videos on that in the past. So your credit score tends to be uh indicative as a report card too for just kind of how you navigate your credit, and so the net worth is more for building wealth, and so you can kind of think of it as that if if you're doing well, it's all relative, and so I'll kind of revisit that at the end of this episode, but it it's kind of your own personal growth. So if you started out at one point this year, uh let's say January 1st, 2020, and your goal is to increase your wealth, well, what do you want to put a number on that? Do you want to increase your wealth by 10,000? That'd probably mean that you'd have to save pretty close to $10,000 over the course of 2020 because although investment growth may happen, and and that'd be awesome if it did, you don't want to count on it. And the best way to build wealth, at least early in your career and and even in your mid-career, is to do the hard work yourself. So save yourself, and then your investments hopefully will do their thing over the long term. Before you kind of want to think about where you want to go, you have to figure out where you are today. And so that's where net worth is helpful as well. So your net worth is basically where you're at today. It's not where you hope to be, it's not wishful thinking, well, if if all these great things happen, then I'll be a millionaire at that end of the year. Well, that's great, but what's reality and where are you at today? And so from that, you can kind of focus in on a couple of other things. I call this like a SWOT analysis. Sometimes I swish out the O for a P uh to make it SWPT. But basically what that is is understanding what your strengths are today, too. And so your net worth could be a positive, it could be a strength for you, it could be a weakness for you. You definitely want to be aware of your weaknesses as well and make sure that if there are weaknesses that you can shore up, that could be a good goal for 2020 is kind of strengthen those things, maybe financial literacy or just financial education is something you want to work on. So definitely tune into my podcast regularly. Opportunities and why I switch out opportunities is because I actually like the the word possibilities more when it comes from financial planning to kind of thinking into the future. I think uh opportunities are great because they kind of come by and they can be whatever, but possibilities is like, whoa, what's all the cool stuff that would inspire you and actually make you want to make changes? Because looking into 2020 or any time that you may be listening to this and wanted to make a change, it's it's not easy to make changes. So you need to really be rooted and grounded in all the cool possibilities if you make these small changes, a small level up improvements over the course of 2020 or 2021, whenever you're listening to this and just kind of gradually make those improvements, it's gonna be painful. So you want to focus on all those cool things that could be possible if you make these changes now. And one of the benefits of starting early is it increases the possibilities, it increases the opportunities. I don't think I've ever mentioned this to you guys, but basically I would have never been able to start level up financial planning if my wife and I didn't make certain decisions, certain strong financial decisions early on. In a lot of ways, they're small sacrifices that we had to make and kind of save up a sizable amount of savings in order to ride out this long process of building up a business from zero income. Those possibilities wouldn't have existed if we wouldn't have started doing things early, and we didn't actually do it with the thinking that, oh, we're gonna save all this money so we can launch a business. It just kind of happened as I was growing frustrated with different things and financial planning, my employer specifically. And so because it was a possibility that was kind of out there, a wild terror thing, it was something we were able to act on. So that's one of the cool things about possibilities is as long as you're moving in that direction, there's other possibilities available too. It's not just the goals you can think of today, it's what opportunities you might not even think about today that open up as a result of the changes and things that you're doing today. And I think it's important too to be aware of threats. I think that's a big weakness of a lot of people I run into not having proper life insurance, not having proper disability coverage. A lot of employers only cover disabilities for that specific job title. So what happens is if you could work at McDonald's, well, technically that means you're eligible to work. So you may not be able to get the same types of benefits that you would have thought you were entitled to through your employer disability policy. So you want to make sure it's own occupation, disability coverage to make sure that you do not get surprised. So those are just a couple of threats, but there's a lot of different things that you might think of. Once you figure that all out, it's helpful to know kind of what resources you have and your assets, which is the left side of that calculation for your net worth. And that's basically what our savings ended up being for me, being able to all of a sudden launch a new company that wasn't on our radar initially. And the most common types of assets are gonna be like real estate, so that may be your home or maybe you have rental properties. So uh that definitely is an asset for sure. Uh, there's savings, so that's whether it's check-in, savings, it could be in a CD. And then the third kind of major asset is gonna be investments, where it's specific to investing in something that you hope will grow over time. So that could be the stock market, it could be the bond market, uh, there could be some other uh real estate investment trust, different types of investments that you have that you own with hopes of it increasing in um value. So those are what assets are. Assets tend to go up in value. Technically, you can consider like a vehicle to be an asset, but vehicles actually depreciate. And so assets are it's important to grow this side of the equation for sure. I'm sure early in your career and and maybe even now you your liability side might have been grown, but you definitely always want your assets to be grown on that side. And the right side of the equation is gonna be the liability. So this this is the area where it could there's a spectrum of debt that you can have. So liabilities are basically debt, it's money that you owe to someone else. That's what a liability is, and not all debt is created equal. So on the left side of this image that I want you to imagine if you're just listening to the podcast, but yeah, definitely if you're watching the video, you'll see it too. On on the left side is the bad debt, so it's kind of red arrow there. As you move to the right, it starts to go towards like a green color, and so that would be good debt. So going from left to right, credit cards, horrible debt, bad debt, and it's because the interest rate is so ridiculous. Some of those are like 25-24%, really high interest rates. Not good to owe balances on that because just making the minimum payment, you're never gonna pay that off. You're gonna pay a multiple of what you actually borrowed initially because the interest rate is just so high. So credit cards are great to use if you pay them off every month, but if you don't pay them off every month, they turn into debt and they turn into the worst kind of debt because of that high interest. As you move along that spectrum, personal loans still not a great debt to have. They have higher interest rates. The most often I'll kind of see anywhere between like an 8% personal loan rate all the way through like a 16 or 20%. So obviously, depending on the rate, that that makes it better or worse in terms of how personal loans uh fare. But most of the times those are gonna be more for emergency type expenses, which means you didn't have an emergency savings fully funded or established to kind of ride out whatever that situation is. Sometimes people take it out to go do travels and vacations, so not the greatest form of debt to have by any means. Uh, the next one, kind of right smack dab in the middle, is gonna be an auto loan. So uh reason why it's not horrible debt is because the interest rates tend to be reasonable, and that's because it's tied to an asset, which is the vehicle itself. And so decent interest rates, but there's definitely a range of uh options you can choose when you're purchasing a vehicle. You can purchase a $70,000 vehicle or a $15,000 vehicle, and they may be just as equally reliable. So that's that's something that personally you have to decide what you're gonna do there. You can make a bad auto loan decision, or you can make a good auto loan decision and have it not be such a burden as far as uh a debt goes. Moving along the spectrum, I'd say people would probably classify this, and I almost was considering just putting this off the spectrum altogether and just putting a question mark next to it. But student loan debt uh in my situation, it has been beneficial, in my wife's situation, it has been beneficial, are specific things that we went to school for and obtained student loans for, did end up producing a job that produces a decent amount of income that would easily cover the uh additional cost of the debt that we have to pay. So I know that's not the case for everyone, but student loans are a form of debt to kind of help you invest in yourself and grow in your career, which could be an exponential return. So I I still put that on that spectrum closer to a good debt than it is a bad debt, but obviously it's what becomes of that education that which is gonna be the biggest tell of whether that was a good investment or a good debt to take on. And then the one of the best forms of debt you could have is gonna be a mortgage loan, and that's because the interest rates are crazy low, so they're in 3%, 4%, very reasonable. Uh, the biggest thing, again, this kind of goes back to the auto loan comparison. You could over-purchase a home. The lenders don't care about whether it's a good financial decision for you. They have their own calculation they do in the back of their head, and their calculation is what's the chances this person doesn't pay us back? That's their calculation, and that's how they determine how much of a loan they're gonna give you. That's not, is this the best thing for this person? So you have to make that decision yourself uh and weighing your short-term and long-term goals too, because if you're planning on going from a two-income household to a one-income household, you have to factor that in uh because when you have a two-income household, they're gonna let you get approved for a lot higher of a mortgage loan. So just weigh those things out, make sure you have these conversations before you make these big financial commitments because they can be super stressful uh if you don't think even just a few years in advance of kind of what some of your short-term goals might look like. So, lastly, I told you guys and to bring it back, you have to have perspective with these and be very specific to your own situation. So I can say that I have clients all over the spectrum, uh, as far as starting out with uh negative net worth, some that have over a million dollars of positive net worth, and they're all good clients. Yeah, I'd say all my clients are good clients, and so it's really just what are you doing to be improving upon this situation and and what goals are important to you that are gonna make you move in the direction that you want to achieve those goals, and you're gonna be willing to deal with some of that discomfort of doing the right things, like saving to increase your net worth, investing to increase your net worth, because that really what's happening is you're making those trade-offs instead of spending that money and doing something else with that, you're making that long-term decision to grow your wealth over time, and your situation is different from everyone else. I mentioned student loans, I mentioned I myself and my wife have student loans, and a lot of my clients have student loans, but that's not everyone. If you don't have student loans, then that's a great thing that kind of gives you a slight head start there. But there might be other stuff in your past. Maybe you didn't go to school, and that's why you don't have student loans. So you might have a different path that you have to take, but really it's just kind of owning your own situation. I call it running your own race. Uh, I know it's very easy to get distracted by what other people have, whether it's because they're your co-workers and whether they're old classmates you see on Facebook, social media, things like that, where you're like, oh man, I can't believe they have all this nice stuff, but I I don't have things I can show off because uh you're not usually posting your savings account balance, your uh investment account balance, and things like that. That's not stuff that people normal people talk about, I would say. And so uh just know that all you can focus on is what you're doing and making sure you're doing the right things for your goals and what's important to you, and don't let what other people are doing, because I'd argue a lot of times the people that are flawing those things and sharing those things, it's they're not making the best financial decisions, I would say 90% of the time. If they're constantly showing off stuff, they're they probably their net worth does not look that great, and it probably never will. And so unless they kind of have a reality check and want to start making improvements. So hopefully this is helpful for you. I want you to know whether you're starting with a negative net worth or a positive net worth, you can improve and you can make better financial decisions, you can improve and attain your goals in a way where you're still able to live a great life and balance things out. It just takes a little bit of hard work and uh structure to make those things possible. And so hopefully you'll get that with some of the other uh podcast episodes that you'll get in this kind of uh half season that I'm gonna just kind of crank these things out for the new year 2020. Have a great 2020, and as always, feel free to reach out if you ever think that you need more one-on-one assistance. Thank you for listening to Techie Personal Finance Bootcamp. Remember, if you like what you've been hearing, to subscribe, review, and share with your friends and colleagues. If you want to take your connection to the show to the next level, you can find me on LinkedIn or on Facebook. Catch you next time on Techie Personal Finance Bootcamp.