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The true yardstick for measuring financial success is your net worth.

However if you search the internet there are various opinions on how one should calculate one’s net worth.

Today I will share with you how I calculate my net worth and the reasoning behind why I chose to do it this way.

The best way to start a discussion on net worth calculations is to boil it down to its simplest form:

Net Worth = Assets – Liabilities

The Net Worth Purist Method.

A net worth purist would treat the above equation as gospel and dutifully add up the value of everything he or she owns and then subtract whatever outstanding debt he or she has.

This method is also not without its flaws.

There is also a lot of subjective bias when using this method to determine net worth because most people have a tendency to overvalue at least a portion of their possessions.

The only way to know the true worth of an asset is to test it out on the open market and see what offers it would receive.

Anyone who has every sold a home knows that the listing price and the actual sale price are often quite different.

While the net worth number obtained would indeed be the largest using this method, it does not have much practical purpose and is useful only for bragging rights.

Why do I feel like the net worth number obtained is not useful in real world situations?

It is very unlikely that you will be able to sell all your worldly possessions for fair value even under the best of circumstances.

And if you were forced to liquidate your assets during a financial crisis, you will likely have to give a deep discount in a distressed sale.

The Xrayvsn Net Worth Calculation Method.

When I first created an excel spreadsheet to track my net worth, I thought long and hard about what I wanted to include and what to exclude.

I wanted the number I calculated as my net worth to represent what kind of lifestyle I could achieve after I gave up medicine and fully retired.

This line of thinking originated from the safe withdrawal rate (SWR) mentioned in the numerous retirement blogs I frequented.

By now everyone is familiar with the 4% SWR that was first introduced in the Trinity Study.

The question is 4% of what?

I decided that everything I inputted into my net worth calculation could reasonably be used during my retirement drawdown.

Yes I would be leaving some assets out of these calculations that would ultimately under-represent my true net worth but that higher number would carry less of a meaning for me and only serve to stroke my ego.

The liability component of the net worth equation was incredibly simple as it was $0 since April 2015 when I finally owned every blade of grass on my property.

Yes, I know at any given moment I have a balance on my credit cards, but those balances are paid in full bi-monthly (coinciding with my paycheck).

The assets I choose to include in my net worth spreadsheet.

1. Taxable brokerage account
2. 401k
3. Ohio Pension value
4. Health Savings Account
5. ROTH IRA
6. Savings Account
7. Commodities/Precious Metals
8. Real Estate (Syndications)
   • I try to simplify this line item by just using my initial investment value for each entity knowing that the true price may be higher or lower than this amount.
     • It is just too difficult to know the true value of these investments until they exit (as evidenced by my one completed investment that exceeded expectations).
   • One syndication fund I invest in (Origin Income Plus Fund) actually does provide a monthly net asset value (NAV), so I know that value is more accurate than the others in my spreadsheet.

 

The result of adding the value of these assets is what I deem as “Usable/Consumable Net Worth,” which is essentially what others refer to as “Liquid Net Worth.”

 

The assets I choose NOT to include in my net worth spreadsheet.

1. Primary Home Value
2. My daughter’s 529 College Fund
3. Value of all my vehicles.
4. Jewelry
5. Life Insurance Policies

 

I know there are options to tap into my primary home equity to support retirement if needed, such as a reverse mortgage or even by selling and downsizing, but I still prefer not to include it in my liquid net worth calculations.

I also know of people who include the value of their children’s 529 plans in their net worth, but again I refrain from doing so.

Even though I technically own my daughter’s 529 plan, I know this money will be used by her for higher education and it would not be available to me in retirement.

I therefore think it is pointless to include it as part of my liquid net worth.

I know if I am in dire straits I can hock all my jewelry and sell my vehicles to tap into some cash if needed, but again these items do not meet the threshold for my planned retirement draw down.

I therefore treat all these excluded assets as a hidden stash of value only and do not include them in my primary calculations.

Why liquid trumps total.

I value the Liquid Net Worth model far more than the purist true Net Worth model because the former allows me to anticipate what my annual drawdown will be in retirement.

In the back of my mind I have a very rough idea of what my primary home should be worth and can then come up with an estimated total net worth.

This higher number is far less useful for me but does gives me a sense of where I truly financially stand.

I time my liquid net worth calculations to coincide with my bi-monthly paycheck.

With the data obtained I can then create a net worth trend line which gives an easy visual representation of the progress I am making.

 

 

Some highlights of my liquid net worth chart:

• In the very beginning I was relatively bad with keeping track of my total finances (hence the very sparse data points during this time period).
• The lowest documented net worth I could find was (negative) -$846k.
• Somewhere between 11/1/2009 and 3/20/2015 I crossed the $0 net worth point.
  • This largest gap between data points was courtesy of my divorce and the turmoil caused by my ex for multiple years after (including defending a $4M civil lawsuit initiated by my ex).
• The slope of the trend line (which can be computed if making this chart on Microsoft Excel) is the average of the amount of increase or decrease your net worth undergoes on a daily basis.
• One of the biggest deviations from the trend line (which thankfully was a positive one) resulted from my grand slam investment.

 

 

Note:

If you are in search of financial help, please consider enlisting the service of any of the sponsors of this blog who I feel are part of the “good guys and gals of finance.”

Even a steadfast DIY’er can sometimes gain benefit from the occasional professional input.

 

 

-Xrayvsn