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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Now that I’m retired, I want to see my net worth decrease by less than the amount I’ve withdrawn from my investments for living expenses over the previous year—and, of course, it’s even better if my net worth increases.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.
I calculate our net worth quarterly as we are living off our retirement assets until we claim Social Security at 70. I want to keep close tabs on how we are doing. I’m curious as to how you value home furnishings etc. I exclude these items as I feel without getting appraisals, which would be a waste of both time and money, there is no way to accurately value these items.
Financial statements are based on concepts of consistency and completeness. So, I always include household goods. I use the amount of coverage on my homeowner’s insurance for the value.
Am I missing something? I consolidated all investments at Fidelity and linked my bank as well. I added the value of my houses.
Our retirement and non retirement accounts, bank account balances and net worth are all updated automatically every day. The most I have to do is update house value maybe once a year, if that. Can’t think what more I need.
I’ve used this Fidelity feature for years. It has some weaknesses, specifically it does a great job of current valuations, but is lacking on retaining historical information. I have also struggled to print meaningful reports from the information. I periodically screen print the information and stick it in our safe deposit box to leave a snapshot of what to look for upon my demise.
I do the same thing at Schwab, but these tools do not include other assets that may or may not be significant, like cars. Also, including everything provides completeness and consistency.
Dick – I have a comparable option to Fidelity’s via my brokerage account through another outfit. My only concern is the privacy policy around my data. My Quicken data remains stored on my hard drive (though I do back it up to our encrypted family cloud server in case of a disaster).
I really don’t want my discount broker having a detailed list of everything I choose to invest elsewhere. My fear is that a marketing push will commence in earnest as we approach specific age-based life events, such as our retirement. They can offer the service ostensibly for free, but my gut tells me that they must have plans to do some data mining to make it cost-effective for the company.
My brokerage company says it’s a free service, but I feel like my data will live on their servers forever. Just not comfortable having that robust level of detail being captured and stored on a website with a financial services vendor.
Lots of different methods mentioned in the comments here. I use a simple excel spreadsheet just like Mark, updated once or twice per year. Takes me about 10 minutes and the columns give me an easy way to look back over many years to check my progress.
Permit me to make one of my semi-regular plugs for using Quicken. The ability (once all accounts are setup inside the software) to know our household’s net worth (the total appears right on the dashboard screen at the bottom of our accounts list) within a few dollars of yesterday’s closing market value is very helpful. Quicken nicely segregates our banking / cash accounts from our investment accounts and further partitions the retirement accounts from our non-TQ brokerage accounts. I can generate an almost “real-time” detailed net worth report (if desired) in less than 30 seconds.
Most importantly, the software auto-updates our multiple account balances each time I log in and downloads all new bank transactions, which makes account reconciliations a breeze for us!
To be candid, the thought of having to manually input and regularly update our account balances in a spreadsheet application gives me the shakes. Since I still work (small business owner), Quicken also helps me stay on top of my business accounts and operating cash flow needs.
More importantly, I now have a 30-year searchable database (I started using Quicken in ’94) which can show me with just a few clicks what I paid for something…and when I paid for it. This is a great tool when something in the house breaks down and may still be under warrantee or within the allotted time allowed for a return with refund at the store. Likewise, the Quicken reports function is very simple to use. These reports are also helpful to our accountant during tax prep season.
In order to know where our family is going financially, it’s always helpful to first know where we have been. Comparing our YTD expenses (via Quicken reports) to prior YTD expenses is extremely helpful in this regard.
Yes, there is an annual software licensing fee – last year it was 83.00, including state sales tax. That works out to $6.91 a month to simplify our finances, thereby giving me back me the gift of more time for the things we enjoy doing as a family.
I’ll second you on Quicken, although I grudgingly pay the annual subscription requirement which unlocks all features. I started using Quicken on 1/1/1999 and manually entered investment data back to March of 1993, so I have over a 30 year history. I update once a month when I pay bills and balance our checkbook. Yes, it’s a bit of an addiction.
I’ll join you on your Quicken soapbox! Quicken is the way to go for easy reporting. But I still am using my old “desktop” software, call it frugality gone awry.
I’ll likely take the subscription plunge in 2025, albeit kicking and screaming. I may even start fresh and not import the decades of old information!
I’m still cheesed-off at Quicken for going to the yearly subscription model. I used to go three years or so between paying for software upgrades. On the occasions when Quicken’s communication with Schwab or my credit union breaks down (I’d say this happens every year or so), I find they are slower to address the issue than I like – but that’s probably because I used to work for a software company and have been on the receiving end of urgent customer calls when something breaks.
Like you, I have used this tool since the dark ages, and I set up all the account categories the way I wanted them long ago, however I’ve occasionally added new ones. You’re right, it’s easy to research old transactions, do comparisons, etc.
Knowing your net worth is very important. I wonder if your treatment of certain assets as liquid is as accurate as it could be if you don’t make an allowance for how much net of income taxes you would actually realize when you sell it(them),
If you are a 22% Fed Inc Tax bracket, the real amount you could realize from extra retirement account withdrawals in an emergency situation would be 78% or less from that sale,
Likewise, sales of appreciated assets in a taxable account also need to be discounted for Capital Gains tax,
I think of liquid assets as cash, and cash equivalents like MMFunds. If you want/need a liquid net worth number, (fire sale value), you need to reduce the value of some assets for taxes and sales expenses.
As a CPA, I agree, that would be correct accrual accounting. But I enjoy simplicity. For most people, cash basis accounting is fine.
I would both expand and refine your provision for income tax. A personal balance sheet is a snapshot at a chosen moment in time. The marginal tax rates on unrealized ordinary income and taxable gains or losses vary based, among other things, if a taxpayer has sufficient income at that moment in time to be taxable (think standard deduction), if the income is taxable (think Roth), or subject to tax at capital gains rates (think 0% capital gains rate brackets, lower CG tax rates if taxable), the state where you live (think NY high tax rates vs. Tennessee 0% state rates, or if the taxpayer has just died (think step up or down in tax basis at death) and how the decedent’s assets were titled.
I like to plan my taxes using a motion picture thought pattern where my taxes are determined based on the time frame that I expect the unrealized taxable income are most likely to become realized. A fixed date estimate of taxes on unrealized income will likely overstate or understate the actual tax that occur when comparing the balance sheet to the income statement on deferred gains and losses.
That being said I like to remember in my planning a comment often quoted attributable to Larry Swedroe – “Don’t treat the highly likely as certain, and the highly unlikely as impossible”.
The final sentence is critically important!
As a corollary, I often tell people that, “things that have never happened happen all the time.”
Here is what I don’t understand in the retirement withdrawal process, based on what I think you (and many other people say) said.
Your annual withdrawals are determined by your living expense needs and if your assets decline too much you may not be living within your means.
When we are working our spending is constrained by our income – assuming we don’t want to keep going into debt.
Why do we reverse that in retirement?
Let’s say we want to be sure our assets grow or at least not decrease in retirement and set a withdrawal percentage of x%. We then know from day one the amount we have to live on each year and we know it will be inflation adjusted if we desire.
That amount is used just as we did our working income and all spending must fit into that income.
Compare this to taking our current and variable spending whatever it may be as a withdrawal each year.
I live on a pension, not only must all my spending come from that fixed source, it has no COLA so my spending must adjust.
Isn’t the fixed percentage withdrawal rate a similar concept?
These two statements,
Let’s say we want to be sure our assets grow or at least not decrease in retirement and set a withdrawal percentage of x%.
I live on a pension, not only must all my spending come from that fixed source, it has no COLA so my spending must adjust.
Do not reflect reality for most retirees. They are not fortunate enough to have pensions which can cover anywhere near a their expenses.
As an example after 40 years working as a Physical Therapist, my pension with 100% survivorship benefit is just under $800 per month.
Similar yes, but that was the first point of the article. I agree that setting a withdrawal budget makes sense. But just as with my working years, my retirement income level tells me nothing about my financial strength and ability to fund future years income.
I do the same. It’s near-zero work to value the investment portfolio part since Excel now has a better way to look up the price of ETF or mutual fund securities. In my non-liquid net worth I’ve included the present value of deferred Social Security and annuity benefits we’ve earned or purchased along with the Zillow estimate for the house. I don’t bother with the cars or other goods. Having a good estimate of net worth has been helpful for preparing to update our estate plan.