Today I want to share with you a recent experience I went through and how it taught me the importance of truly tracking “wealth”. A few weeks back we applied for a commercial loan, which required lots and lots of documentation, however one document in particular stood out to me… my personal financial statement. While this exercise felt a bit daunting at first, I think it was SO helpful to see where my “net worth” stood. I looked a little more into tracking your net worth and why it can be so important when investing in real estate.
So, as we do, let’s talk Real Estate, let’s talk PERSONAL FINANCIAL STATEMENTS – TRACKING YOUR NET WORTH…
Net worth is probably the most important measurement of personal wealth.
WHAT EXACTLY IS NET WORTH?
Basically, a snapshot of your financial health, aka how wealthy you are. It’s your financial position at any point in time; the difference between your assets and liabilities ; what you OWN vs what you OWE.
Assets – Liabilities = Net Worth
WHY IS TRACKING YOUR NET WORTH IMPORTANT?
To name just a few reasons…
True measure of wealth : avoids over emphasis on assets by taking into account asset value vs associated debt
Tracks financial progress
Balances out income vs expenses
Helpful when applying for a loan
**Can highlight assets you may not have realized you had and can use to further invest**
WHAT SHOULD I INCLUDE IN MY ASSET CALCULATION?
Liquid Assets : Cash on hand, cash in the bank, certificates of deposit, treasury bills, money market funds, and any other cash equivalents
Retirement Investments : Employer sponsored retirement plans (401(k) and 403B plans), as well as personal retirement assets (traditional or Roth IRAs or solo 401(k)s)
Real Estate : Market value of your primary residence and any other properties you may own, always best to be conservative here as the market fluctuates all the time
Business Assets / Equity : If you are a business owner…
Personal Assets : Cars, jewelry, boats, etc. Some people do not include these in their calculations, especially if they have no intention of ever selling these assets (i.e. something like my engagement ring – thanks PK, although I guess its technically his until the day I say I do… ANYWAYS I did NOT / will NOT include this on my personal statement).
Other Assets : Any other assets you may possess that do not fit into the above categories. An example I read about and would have never thought of – MY SECURITY DEPOSIT FOR MY APARTMENT – TMI but this is like a $6k+ value so I 100% included it in my asset category. Something else I never thought to include here? CASH VALUE OF LIFE INSURANCE POLICY. Turns out it is possible to borrow against this balance if necessary (**I am not an accountant or financial advisor so please seek a professionals input on this before exploring this option**).
OKAY, NOW FOR THE ICKY STUFF – LIABILITIES – WHAT DO WE INCLUDE HERE?
Mortgages : If you have one, put the total outstanding balance here! A lot of us in this “let’s talk Real Estate” community live in NYC and do not own a primary residence – so I included my rent payment. If you own any rental properties in your personal name, or personally guarantee the mortgage on any investment properties, make sure those mortgage balances also get stuck in here!
Outstanding Loans (Personal) : Whether it be a car loan, student loan, a loan from family/friends to get your business up and running, or any installment loans, you would include those in the total balance here. This can be tricky, but if you are attached to a loan in any way, whether it is your own or you are the co-signer, you should include it. For example, and I know I will probably get backlash for this as it may be TMI but I am just trying to keep this as real as possible; I have a super small student loan and while an outside party pays the loan on my behalf, I still would want to put this in my personal financial statement, especially when applying for a new loan.
Outstanding Business Loans : Only include these if they are a personal liability aka you personally guarantee them.
Outstanding Credit Card Debt : I think this is self-explanatory? The only thing here is that for most of us, the amount we spend on our credit card changes all the time so this can be tricky to track if you are paying off your total balance every month.
OKAY I’M DONE, NOW WHAT?
Subtract your total liabilities from your total assets…. Most of you probably find that statement annoying and obvious but just laying out the steps clearly to get to my next point…
WHAT DO I DO IF MY NET WORTH KIND OF SUCKS RIGHT NOW?
First of all, everyone has their own opinion of what they find to be an “acceptable” level of wealth so keep that in mind… BUT, let’s say my net worth is negative, or extremely low – the good news is – this is an ever-changing number and YOU CAN fix that! Statistically, our net worth is supposed to get better as we age and pay down our debt so I guess that’s one thing to look forward to about getting old! (this is a joke, please do not take that personally, I am not anti-aging)
Essentially we want to work to increase our assets and decrease our debts – it may be as simple as putting a little more in our retirement account every month (increase our assets) OR paying off our credit card ahead of time (decrease our debts).
HOW CAN I DETERMINE MY TARGET NET WORTH?
Investopedia references the following calculation to help us determine a “target” net worth by simply plugging in the below inputs…
Target Net Worth = [Your age – 25] x [Gross Annual Income / 5]
SO HOW DOES TRACKING MY NET WORTH HELP WITH REAL ESTATE INVESTING?
(1) It forces us to actually understand just how wealthy or un-wealthy we truly are
(2) Laying all of our assets out in plain sight may help us see that we actually have more assets we can utilize and invest with …. Many people end up using their retirement accounts to help them invest – whether it be borrowing against it OR setting up a self-directed retirement account! That method is 100% up to you however I am NOT suggesting you get rid of your 401(k) which I know MANY people preach about… I am a firm believer in diversification and will personally explore all other methods of raising capital for RE investing before I touch my 401(k) from corporate america life – again this is JUST a personal opinion.
(3) Constantly monitoring your mortgage balance can help you see just how much equity you have in your home. Once you have built a substantial amount of equity you can pull the money out via a HELOC – hello borrowing from yourself. If you do not plan to sell this property for a while this may be a great option to explore!
NOW, there’s a chance all of you read this week’s post and were like “okay, this is all obvious”, BUT how many of you actually have a personal financial statement typed out and ready to go? Something that you regularly monitor? I will say that I DID NOT until recently, but I will now be religiously stalking my “net worth” going forward.
How often do YOU all track your net worth? Is there anything else we should be including / excluding on our personal financial statements?!
Feel free to comment on the blog post and let us know what YOU think!
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