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I KNOW FOLKS WHO consider their income to be the best measure of their wealth. Income, however, doesn’t gauge whether you’re making headway toward financial independence.
What does? My financial statement provides everything I need to measure my progress. At the end of each December, I gather the dollar amounts for my assets and liabilities, and assemble the details on a spreadsheet that compares my current standing with prior years. If you’re inspired to do the same, you don’t need detailed categories. Just be realistic and consistent, measuring the same categories at the end of each year.
In my case, for my assets, I include the value of my cash holdings, bank accounts, taxable investment accounts, retirement accounts, household possessions, cars and real estate. In the past, my largest liabilities have lined up with key assets, including car loans and home mortgages. You might also need a category for credit cards and other unsecured debt.
These spreadsheet categories allow me to build my financial statement. It gives me three measures of my financial standing as of year-end:
My annual net worth number is the simplest way to understand if I’ve made progress toward my goals. I simply compare it to the year before. Up until I retired, I wanted to see my net worth rise each year.
Admittedly, this measure has limitations. My net worth can be inflated or depressed if the value of my investments or real estate has changed drastically over the previous year. I’ve seen how quickly prices can change up and down. An increase in my net worth, however, does at least imply financial progress.
Now that I’m retired, I want to see my net worth decrease by less than the amount I’ve withdrawn from my investments for living expenses over the previous year—and, of course, it’s even better if my net worth increases. If I succeed, this implies I’ve lived within my means, and that my current withdrawal rate should be sustainable. Again, this measure can be jarred loose if my investments or real estate have a major downswing over the preceding year.
My liquid net worth is another way of seeing if I’ve made progress against previous years. At times, especially when I was young and my borrowing was substantial, this number could be negative. Don’t be surprised if your liquid net worth is volatile and unpredictable. Heavy expenses can come in waves if, say, you remodel a kitchen and replace a car in the same year. That can drain your readily available money relative to your debts.
As I’ve repaid loans and my investments have grown, my liquid net worth has become a reliable measure of my financial strength. On top of that, now that I’m over age 59½ and the tax penalties on early withdrawals from retirement accounts no longer apply, I’ve started counting all my retirement money as liquid assets.
That means my liquid net worth now encompasses everything except my home and household goods, which would take time to sell. Since I’ve now paid off all my debts, I’ve decided on a new financial goal: How much of a legacy do I wish to leave to my kids? All three of my measures will help me to steer my finances toward this new objective. As the management expert Peter Drucker told us, “If you can’t measure it, you can’t improve it.”
Mark Eckman is a retired CPA who spends more time with his grandsons than his portfolio. In retirement, he’s realized change remains the only constant, and he’ll adapt. His priorities: family, food and fun. Follow Mark on Twitter @Mark236CPA and check out his earlier articles.
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I’m still using Quicken Basic 99 (local only – I don’t let it login to the internet). I just finished installing it on my new Windows 11 PC. Around 15 years ago I bought the newest Quicken version and hated it, so I’ll use 99 as long as I can still get it working on my current computer.
I manually update my investment account balances spreadsheet on the first day of every month. I enjoy doing it. It doesn’t take long to login to my brokerage and get the balances of the funds in my traditional IRA, Roth, and taxable accounts.
Am I missing something? What is the point of including in net worth stuff you own but could not sell without then buying a replacement? Stuff like your home or car or household furnishings?
I suppose if you could sell something and then replace it with something of less value (downsizing) you could include the difference in value. But even selling a house and moving to rented space is only exchanging the imputed rent of the house for a real rent payment.
I will reply to my own comment. Perhaps there are two net worth’s. A net worth for retirement purposes, which is a measure of funds available to pay for continuing to live during retirement; and a net worth at death (estate), which is how much will be distributed when retirement ends.