I’ve talked a lot about net worth recently. I talked about what net worth is and why you should care about it. I went against my own advice and gave you some resources to compare your net worth to others. What I haven’t done is share my own net worth.
Well, today is the day. Kind of. I’m not going to give you specific numbers, but I will tell you how, when and why I calculate my net worth and show you the trend line of my net worth over time.
Why won’t I share my real net worth?
For one, I’m trying to lead by example and demonstrate that the important thing about net worth is how it changes over time, not how it compares to anyone else. Also, since this blog is not fully anonymous, I’m not comfortable putting the real number out there into the “blogsphere.”
My net worth calculations
As I mentioned previously, you can chose to include or not include a variety of numbers in your net worth calculation. It doesn’t really matter what you choose as long as you are consistent. I choose to include only fairly liquid assets in my net worth. This means that I do not include the value of my home. I therefore also do not include the liability of my mortgage. If you were in danger of going upside-down on a mortgage (i.e. the value of the home is less than you owe on the mortgage) this would be a bad strategy. I am lucky that my home has appreciated in the time that I have owned it, so really what I am doing here is not recognizing the equity I’ve built in my home.
Why do I do this? Well, a home is not a liquid asset, meaning it cannot be easily sold. It is also not straightforward to value a home as no two homes are exactly alike. Unlike a stock, which has a vast market and therefore a given price at any point in time, a home can’t be valued without actually putting it on the market. You can make approximations based on comparable sales, but that is really just a guess. For simplicity, I exclude my home from my net worth. The other benefit of this is that I essentially have a large asset that I am not accounting for when I look at my financial position, making it a very conservative analysis.
Here is a summary of what gets calculated in my net worth:
You may be wondering why, if I don’t want to include illiquid assets in my net worth, I’m including my retirement accounts. I include these accounts because they have a defined value (my holdings in these accounts are all stocks, bonds, mutual funds and ETFs). They also have a defined penalty for early withdrawal, the terms of which vary by account. In a true emergency, I could sell all of these assets, pay the penalties and get the cash much more quickly than I could sell my house to get cash out of that.
You’ll also notice that my car is missing from my net worth. My car is basically worth nothing, so I choose not to include it in the calculation. You may also notice that debt is missing from this calculation. I’ll go into this in more detail in the future, but I am very lucky to be debt free aside from my mortgage.
Tracking my net worth over time
I keep a series of detailed financial spreadsheets that I update on a weekly and monthly basis. Simply by inputting my account values into my spreadsheets each Friday and on the first day of each month I am able to see my current net worth. I do not put a lot of weight into the weekly calculation as they can be affected by short term fluctuations, such as a business expense that is awaiting reimbursement. I focus mainly on the monthly calculations and I graph how that changes over time.
This is what my net worth has looked like over the five years I have been tracking it. As you can see, I began tracking with increased detail in 2012, so from then on there is a breakdown by account type.
You can see that something major happened in June of 2012 causing my net worth to drop substantially. This is when I purchased my condo, and that drop in assets is due to my down payment. If I included my house in this calculation my overall net worth would have gone up more steadily. I’m not really bothered by this drop as I know that I got substantial value (and hopefully a decent investment) out of the cash decrease.
What does my net worth tell me?
I like the see my trend lines going up (except in the case of a big purchase like my condo). So my net worth tells me that I am working in the right direction. I don’t have a specific goal right now of “I want to have $X net worth by Y date.” I am just trying to consistently increase my net worth little by little.
As I was writing this post, it occurred to me that I have never really looked at the breakdown of assets into the three categories outlined here: cash savings, non-retirement investments, and retirement investments. In a future post I will look at how my allocation between these three categories has changed over time and give some thought to what the right allocation is (something I haven’t really done before).
How often do you track your net worth? Do you have a specific net worth goal?