“Guess how much Pete Davidson is worth?” Just about anytime we’re watching something other than Paw Patrol, I’ll pitch this question to Mr. Moneyaire. Perhaps, because we’re so conscience of what our net worth is, we find it interesting to see what someone famous is worth. Mr. Moneyaire checks up on our net worth every month or so. Does that seem like a lot? How often have you checked up on your net worth? Is it even important? Let’s dive into these questions and how to calculate your net worth.

By the way, Pete’s worth about $8M as of this writing.

What’s a net worth?

At a basic level, if you were to liquidate everything you own and pay off all your debts, it’s the amount of liquid money you’d have leftover. This is what I would consider your wholistic net worth. This is the 30,000 foot view of your financial health. This number is important because it gives you a whole view of your current financial position. This number can tell you if your debts outweigh your assets or vice versa.

A more important analysis of your net worth

Another high level view of your financial self is your working net worth. This number is a proxy for how much passive income your net worth can generate. My personal opinion on why you should care about your net worth is because you want your net worth to generate money for you. Eventually, you want your net worth to generate enough income to pay for all the expenses in your life. You might get there by happenstance, but more likely, you’ll reach this point by checking in on your working net worth and working towards growing this number. I like applying 8% to our working net worth to see how much our assets will grow on average year over year if we don’t add any additional monies. Moreover, the 4% rule applied to your working net worth is even more important. This rule is supposed to tell you how much you could comfortably withdraw from your investments and not run out of money. The key idea being that if your working net worth is growing by 8% and you’re withdrawing 4%, you’re unlikely to run out of money.

The controversy; don’t include your personal home or vehicles

When calculating a working net worth, don’t include your personal home or vehicles as part of your assets. The reason you shouldn’t include your personal home is because it typically doesn’t earn you an income while you’re living in it. To realize an income or gain from your home, you’d have to sell it. Chances are, if you’re in your “dream home” you’re not going to sell. If you’re not in your dream home, chances are you’re probably working towards that. Regardless, even after you sell your home, you’ll still need a home to live in. Whether by renting or buying a new home, a lot of the money you’ll earn from the sale of a home will go right back into providing housing.

Moreover, I wouldn’t include it as an asset when analyzing a working net worth number because more often than not, there are so many ongoing expenses to owning a property. Even if you own your home outright, you’ll need enough cashflow from your other assets to pay for your home’s mortgage payments, maintenance/remodeling/replacements, taxes and insurance.

Tapping that equity

And, yes, I do realize that you can borrow against your home to get at the equity. However, I personally think this is a bad idea. Even if you use this borrowed money to invest, it’s a risky move. There’s a good chance that even in the short term, the investment will be negative. If that investment does go down in value, you could lose your home. Its one thing to lose money in an investment, but to lose money and then to not be able to make payments on a home equity line of credit and lose your home… ouch.

Many empty nesters say they will eventually sell their large family homes and downsize to a smaller one. According to this study, homeowners who do this will likely pocket about $196k. According to the 2023 Home Buyers and Sellers Generational Trends Report by the National Association of Realtors, about 20% of 58 to 67 year old and 19% of 68 to 76 year old home buyers were buying a new home in order to downsize.

Cars don’t count

I also wouldn’t add vehicles to your working net worth, unless they’re a collectible. More often than not, vehicles aren’t going to appreciate in value, they’ll depreciate in value. Its not uncommon to be “underwater” on a car, meaning that you owe more on it than it is worth. Cars are tools to get you to point to point and very rarely produce a profit or income. Even if you’re earning money by driving, say as an Uber driver, you’re still putting a lot of wear and tear on your vehicle. The more you use a car, plane or boat, the less it’s worth, and hence, not a good asset to keep as part of your working net worth. In general, don’t count depreciating assets towards your net worth.

I understand that a personal home and cars could be the most valuable assets many Americans have as part of their net worth. I’m not saying they shouldn’t be counted at all. What I am saying though, is that they aren’t useful to include when trying to understand how much income your net worth could possibly provide you one day. A lot of emphasis is placed on the homes we live in and the cars we drive. Afterall, homeownership is the “American Dream.” I want to challenge that idea a bit. I hope that this idea of not counting your home or cars provides some new perspective regarding what money can do for you.

The Net Worth Equation

After getting some of that controversy out of the way, let’s dive into the net worth equation. At the most basic level, net worth is calculated by adding up all your assets and subtracting your liabilities. Assets – Liabilities = Net Worth. Seems simple enough, right? The hard part is figuring out 1) what to include and not include, and 2) what the values of those things are.

Assets

Assets are all the things you own, of value. It’s your property. In terms of calculating your net worth there are some assets you should count and some you shouldn’t. And then, there are some you may not count depending on what you’re trying to figure out. Here are some of the things I believe should be counted towards net worth:

List of assets

• Personal home(s)* and properties that you own or have a mortgage on, including investment properties.
• Retirement Accounts such as 401k, IRAs, Roth IRAs, 403bs, 457s etc.
• Cash value of life insurance or annuity policies minus surrender charges
• 529 Plans, cash, coins, brokerage or treasury accounts, stocks, bonds, mutual funds, ETFs, CDs and other holdings in your name
• Bank accounts like checking and savings accounts, money market accounts
• Vested options, stocks and other compensation like vested portions of pension accounts
• Precious metals and jewelry made of precious stones and metals. I’d only count the material value not the value of craftsmanship or design. What we Desi’s call the “making charge”
• Fine art and some collectibles

When you tally up your assets make sure you’re using the current values of your assets as opposed to future values.

* Depending on what you’re trying to derive, you may not want to count your home’s value.

List of property that I wouldn’t count towards your net worth:

• When considering a working net worth, don’t count a personal home’s value or your vehicles. When just trying to get the big picture, add them.
• Clothing, accessories such as purses, shoes, coats and fashion jewelry – even name brand designers like Chanel or Yves Saint Laurent.
• Home furnishings and fixtures like couches, tables, chandeliers, drapes, chairs etc. This includes dishes, cutlery (unless it’s a precious metal), fine linens, rugs, crystal stemware etc.
• Electronics and appliances including televisions, monitors, phones, laptops, desktops, kitchen appliances, small appliances etc.
• Books, DVDs, CDs, other forms of media
• Life insurance death benefits
• Timeshares
• Unvested options, stocks, pensions, retirement funds or anticipated inheritances

Liabilities

Liabilities are anything that you owe money for such as loans or debt.

List of liabilities

• Mortgages, car notes, personal loans, other loans for large purchases like a boat or loans against a life insurance policy or retirement account
• Credit card debt
• Medical debt
• Student loan debt
• Back taxes, child support, alimony or judgements
• Any debt of which you are a co-signer

Things that aren’t liabilities but rather expenses that shouldn’t count against your net worth would be ongoing charges, expenses or costs for living your life, like the light bill or your Netflix subscription. Property taxes wouldn’t be a liability either – unless you owed back taxes.

Not Liabilities

• Taxes (unless they are back taxes owed)
• Ongoing expenses like utility bills, subscriptions, groceries, eating out etc.
• Gifts or donations – even if it’s a pledged amount or percent of your estate.
• Membership fees, services
• Debt of your parents or of someone you are not married to
• Upcoming potential costs, like the cost of a wedding or university bill

After you get all the numbers for assets and liabilities, now you can perform the math to figure out your net worth. The hard part of getting to your net worth figure isn’t math… it’s tracking down all the things that go into the calculation.

Calculating your net worth… tricky numbers

Some numbers to figure out your net worth are going to be pretty straight forward. To understand the value of your 401k, all you’d have to do is login to your account or look at your latest statement and see the ending balance. Others won’t be. A pension’s value can be hard to discern and may require some math or a talk with HR.

Another tricky asset to value is your home. I think people often inflate the value of their home, because there is so much emotional value in it. It’s difficult to know what a home is worth, unless you list it and get an offer. That’s the only true way to know your home’s value. For approximations, the way we, the Moneyaires, figure out our home’s value is by gathering market comparisons, or market comps. We track what other similar homes are selling for in our area and approximate our homes value from that. You can also get a “zestimate” from Zillow, or other estimations from real estate sites like Redfin, however those can be wildly off.

Collectibles and art can be hard to peg a value on. We get numbers for these items by searching online what similar items sell for on the secondary market. For jewelry we take the gram weight of precious metals and look up the going rate and apply that. Gems can be super hard to determine the value of (and to stomach). Mined diamonds can lose half their value on the secondary market. ouch.

Getting a value for a car, boat or plane can be tricky, too. Depending on the condition, miles, trim, and maintenance, the price can vary. I do think that when your net worth grows, it’s worth dropping assets with depreciating values, regardless of the net worth you’re trying to calculate. Why? Because they’re depreciating assets. A depreciating asset is worth less and less over time and/or use.

Why is it even important to calculate your net worth?

Net worth doesn’t have anything to do with a person’s value or even intelligence. Having a low net worth or a high one doesn’t make someone a better person. Knowing your net worth is simply an opportunity to check on your financial health, especially your working net worth. Just as you may go to the dentist twice a year or get an annual exam, calculating your net worth should be a routine check in on financial health. We, the Moneyaires, calculate our net worth and keep close tabs because we want to see if we’re on track to hit our financial independence number. This number is important to us because it represents how far off we are from the point at which we’d no longer need to work in order to support our life. Our money would be doing all the work to support us.

Keeping track of our net worth helps us gauge how well our investments are performing and if we need to make adjustments. Knowing our net worth also helps us understand, from a financial standpoint, how decisions we make can affect us and our timelines for retirement. For example, I was able to leave the workforce and become a stay at home parent in part because we had enough in passive income/growth from our net worth to cover my loss of income. It also guides us into staying in the home we have currently. Living in our current home is easy on one income.

What’s a good net worth?

If you do the exercise of calculating your working net worth for the first time and find it is low or negative, that’s okay. Right before Mr. Moneyaire and I got married, we calculated what our net worth was. Between school loans and car loan debt, we were in the negative. Knowing we were in the negative helped give us motivation and provided us insight. We took a hard look at our expenses and it guided our budgeting. It also helped us figure out what we really wanted out of life. But what amount would ever be “good?”

In my opinion, a good working net worth is one that can cover your ongoing regular expenses. For example, if you (and your family) have about $40,000 in regular expenses every year, you’d probably want at least $1M (outside the value of your home and vehicles) in net worth before retiring. Why? Because $1M in net worth should grow about 8% a year, or $80,000. If you only have $40k in expenses, that growth should cover those expenses, the occasional extra or unanticipated expense, drops in market value, inflation and keep growing for you. Of course there’ll be down years and up years, but in the long run, historically, you can conservatively assume 6 to 8% growth on average. Commonly known as the 4% rule for retirement, if you take 3 to 4% of that as income to pay your life expenses, and keep your expenses lower than your gains, then you should be able to live off the gains of your portfolio in perpetuity.

I’m going to write another article that really digs into some more info on net worth and more specifically what a “good” net worth is. If you don’t already, subscribe to the blog, type in your email below and hit “subscribe.” You’ll get notified when I publish my next article.

Living off the “fat”

Ever hear the phrase, “Living off the fat of the land”? It basically means that you’ve become wealthy enough to live well without having to work for it, i.e. passive income. Its deceptively easy to start earning passive income. If you have a retirement account, savings account, brokerage account etc. you might already earn some dividends, or interest. We do, and eventually, we hope that this amount grows to cover a lot of our basic expenses every year. For the rest of our expenses, we hope to cover those with the investment profits from share sales. Our stock gains will hopefully cover what our dividends and interest payments won’t. Essentially, there’ll come a time when we won’t have to work to fund our lifestyle. We’ll be living off the fat of our portfolio. We’ll be able to do this, in part, because we know our working net worth and expenses.

What’s Your Net Worth?

In my next article about net worth, I’m going to dive into what a “good” net worth is. So, get your calculators out and start crunching away. We’ll take a look together to see where you land.

Cheers!

Mrs. Moneyaire