It's 10 pm: Do You Know Where Your Net Worth Is?

by Keith Whelan on 11 April 2014 2 comments

Have you ever wondered how you're doing financially compared to others? If you're like me, it's pretty hard to pass on those articles that show the average earnings of U.S. workers by occupation type. Usually my first thoughts are:

  • Am I doing better than others in my field?
     
  • Which occupations tend to pay more? Which pay less?

But is salary the best measure of how well you're doing financially? It certainly is a good, quick measure of how much money you're taking home at this time in your life, but isn't what you do with that money even more important? (See also: Why You Don't Need to Stress About Spending Money)

Case in point: Our oldest son recently graduated from college and was fortunate enough to land a real job in the education field. After six months or so he complained that some of his other friends were making a higher salary than him. So I asked, "What are they doing with it?" Hmm. That one caught him off guard. Turns out that our son has a tidy (and growing) amount stashed away in savings and even some in stocks. His friends did not have as much saved.

So maybe adding up your savings and investments and the other things you own — your assets — is a better measure of how well you're doing. After all, these are the things you've acquired over the years with your salary. (See also: Asset Allocation Basics)

But don't forget about the flip side — the debts, or liabilities, associated with some of those assets. Things like education loans, car loans, credit card debt, and mortgages should be part of the equation, too.

In fact, the full equation is:

Assets – Liabilities = Net Worth

Net worth measures your wealth, and that's an even better measure of how well you're doing financially than your salary. Take a few moments now to sum up all your assets and subtract all your liabilities and determine your net worth. This net worth calculator will help you do the math.

How Does Your Wealth Compare?

So, how wealthy are you relative to others? After you've calculated your own net worth, fill out the box below. Select the combination of age, total household income (yours plus your partner's if you have one), and homeownership status that most closely matches your situation in the box.

How does my wealth compare?
Homeowner or renter?
Age of the head of your household
Household income from wages (before taxes)
 
Total Assets - Total Liabilities = Net Worth
   
Sources: Federal Reserve Board Survey of Consumer Finances,
U.S. Bureau of Labor Statistics Consumer Expenditure Survey.

How are you doing? Ahead of the pack or falling behind? If your net worth is lower than you'd like, don't be discouraged; the race is far from over, and tools are available to help you make up lost ground.

So How Do You Get Ahead Faster?

Okay, now you know where you stand financially compared to others like you. Whether you're a little ahead or have some catching up to do, it wouldn't hurt to accelerate your progress on the path to financial independence. But how?

There are many tools and strategies at your disposal, but I'd suggest starting with three.

Tackle the Expenses First

First, don't just rely on increasing your income to "catch up" to your expenses. Make it easier on yourself — reduce your expenses. That means:

  1. Lower your monthly living expenses, and
     
  2. Reduce your debt (pay it off early).

Use The 80/20 Rule

Next, pay particular attention to the few "biggest bang for the buck" financial opportunities. Making good choices — and just as important, avoiding big mistakes — on these high impact items can speed your financial progress considerably. For example, a high-impact asset is a house. It's an asset that increases in value over time, so it can increase your wealth. But choose carefully, because mortgage debt comes along with this asset, and so do taxes, insurance, and repair costs — all negative monthly cash flows. So when shopping for a home, one of modest size and cost that doesn't require many repairs is preferable to a palace or a money pit. (See also: Use the 80/20 Rule to Maximize Your Financial Opportunities)

Seek Out Positive Cash Flow Opportunities

Finally, understand both the wealth and the cash flow consequences of every important expenditure you consider. Use this knowledge to seek out and take advantage of "good wealth" opportunities — those that grow wealth while also generating positive cash flow. Some examples of "good wealth" assets — ones that can increase in value and also generate positive cash flow — are rental properties, a business, and stocks that pay dividends. (See also: 2 Things You Must Know Before Making a Major Spending Decision)

And one last piece of advice: Don't worry so much about how well you're doing compared to others. Instead, just focus on improving your own financial situation. That's all that really matters, and that's all you can control.

Has the comparison with your neighbors inspired you to take actions that will improve your net worth and cash flow?

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Guest's picture

I love the recommendation to seek out positive cash flow opportunities. Diversifying income steams is going to be a necessity in the future, I believe. For most of us, this will require reducing pure consumption and increasing investments, such as your example of rental properties, business, etc. With wages stuck where they are, this will be the only way to get ahead.

Guest's picture

Thanks for the comment, John. I agree- in this economy we have to create and take advantage of every opportunity to generate additional sources of income.