A hearty welcome to “Grandma’s Wealth Wisdom” with your neighborly hosts, Brandon and Amanda Neely. This is the only podcast that helps you take charge of your cash flow and leverage your assets, simply and sustainably, the way Grandma used to.
Amanda: Hi, I’m Amanda Neely, and welcome to our Grandma's Wealth Wisdom, where we help you break through to a smart, stable financial future, with the tried and true wisdom Grandma used.
Brandon: Hey, and I'm Brandon, and this is Episode 93, titled, “Is Net worth a Good Measure?” I mean, so many times we hear people asking some form of the question of “Am I doing it right?” I mean, as we do analyses and we talk to people, they're always asking pretty much the same thing, “Am I doing it right?” [00:54.2]
They might ask it in different ways. They might say, Am I saving the right amount? Am I paying the right amount of taxes? Am I paying the right amount towards my investments? Am I making the right investments? Am I paying down my debts the right way? Am I spending my money appropriately? Should I make different choices that way? Am I spending the right amount on marketing for my business or should I be doing other things? And so forth and so on.
Many of those questions, really, you are asking, Am I doing it right? Right? You get the idea and these probably sound very familiar and you might have asked those questions yourself.
Amanda: Yeah, and when I hear people asking these questions, a lot of people begin looking at their net worth to show them if they're doing it right and to provide validation. If their net worth is steadily increasing, they feel like they're on the right track. If their net worth is decreasing, then they're going backwards and that's the only thing they look at to decide, Am I doing it right? [02:02.0]
Brandon: I mean, we've had that ourselves. I mean, many people have some kind of net worth goal. They all want to be a millionaire. “So you want to be a millionaire?” That's even drilled into us. They judge their entire financial path on how close or how far they are from their goal.
Amanda: I don't remember if I’ve told this joke on the podcast before, so forgive me if I had. My dad would always say he's working on his second million, and people will be like, What? They'd be so surprised because there he is in his ripped jeans and totally a blue-collar kind of guy, and they just give him a weird look and they'd be like, Really? And he'd be like, Yeah, I gave up on my first.
Brandon: Ha-ha.
Amanda: But to get back to some seriousness, we're creating this episode because there is and can be some harm in relying on net worth alone. We want to warn you about harm. We're going to share some of the downsides of just using net worth, and then we're going to share an alternative, some different things you might think about in addition to or instead of net worth, so that you can have a better gauge on answering this question, “Am I doing it right?” [03:13.1]
First of all, I have to say that I have a hard time with even the words, “net worth”. I feel like they're bad branding. It makes it seem like someone with a higher net worth is more worthy than someone with a lower or even a negative net worth, and that's just not true. This language is one that breeds a lot of guilt and shame, and I don't like it at all.
Brandon: Yeah, I think being an activist, that's definitely something that I could see you being upset about often. I mean, think about it. We say this thing or that thing is worth it or not worth it. We even account and say certain things, right, about products. We assign value of worth to objects. I mean, this shirt is worth the price, so I will totally spend 100 bucks on this shirt. The pair of socks isn't worth the expense. We're not going to spend 20 bucks on a pair of socks maybe, unless … [04:11.6]
Amanda: You love socks.
Brandon: Yeah, I guess, so some things. Again, we think of how we attribute worth to something, or cars or whatever. There are so many things.
Amanda: Yeah, but we want to be really clear. Humans have lots of worth, period. Doesn't matter how many assets or debts someone has. They are worth it, always, in this case, “it” being they are worth love, respect, honor, all the things that really count. Every individual in the planet, past, present and future, is of high worth, and when you think about worth in that lens, net worth just doesn't fit. It sucks. It's bad branding. [04:50.3]
Brandon: Yeah, and we all know this, but sometimes we need reminders. We don't need a high net worth to have a happy life. High net worth might even be a false indicator of success for a lot of people. I mean, how many times have we heard of that rich person who is lonely and depressed? They might have a high net worth, but that's not the same as knowing their worth as a human in community with others. Again, you've probably heard this on our podcast before. We really think a lot about this.
Amanda: Yeah, so some of you listening today, though, you might need this reminder. You are worth it. No matter your net worth, no matter how you're trending with that number, whether it's going up or down or sideways, you are worth it.
Brandon: Okay, now that we've gotten off that high horse there, now that we've cleared it up, our second point today is that there are a whole bunch of financial health measures that aren't included in net worth and we have a few examples. [05:54.4]
Amanda: Yeah. If your net worth is built on risky assets or it's in non-diversified assets, a large portion of it could just disappear overnight. Do you really have a million dollars net worth if it goes up to 1.1 million today and then down to 800,000 or less tomorrow?
Brandon: That has only happened to a few people a few times, for sure, and you might know some people that that has happened to. If you have a bunch of assets, but none of them are liquid or accessible, what are you going to do in an emergency or when an opportunity strikes? Positive or negative, being cash poor can lead to bankruptcy, even if your net worth is high. I mean, we know someone who, on paper, is a millionaire, but struggles paycheck to paycheck, literally, eating beans and rice all the time because he doesn't have income. He has a very high net worth, but he feels poor all the time. [06:54.8]
Amanda: There's also an inflation issue and/or a tax issue, right? If net worth is steady, but inflation is high, then, really, your net worth is going down and it's in jeopardy, or if you use your assets, the Internal Revenue Service decides they're going to take 25% or more of them and you know that that's true. Are those assets really yours? Maybe you don't even know what percentage they're going to take at this point.
Brandon: Again, we see that all the time. There could also be an income problem. If there's no source of income to meet current and future needs, then that puts your assets in jeopardy. Even if you have a lot of assets, but you don't have the income, that could be a problem.
Amanda: Yeah, and, finally, you probably guessed this one, the burn rate. How quickly are you spending money compared to what's coming in? If there are significant expenses compared to income, your assets are probably going to dwindle pretty quickly or you're going to stack up a bunch of debts and liabilities, and that's going to also eat away at your net worth. You have to be looking at all these other factors rather than just looking at net worth. [08:06.8]
Brandon: Amanda, what's the alternative? I mean, you've been studying your CFP, so you definitely have some alternatives here, right?
Amanda: Yes, and I should say that all of these numbers are important, right, all these things, but us as individuals, we have capacity issues, right? You're not going to track everything. You're going to get lost in the “Am I doing this right?” part if you're trying to track taxes and diversification and all the things you were just talking about, right?
That's where I come back to, first and foremost, knowing your goals. You’ve got to know your goals. You’ve got to know your why, what's most important to you. What are you aiming for? Where are you going? And then you can track your progress to those goals and you can pick which financial health measures are most important toward your goals, rather than trying to look at all of them, because it's just impossible, unless you make money your full-time job, right, to look at all of the measures all the time. Let me give you some examples of what this looks like. [09:11.2]
Brandon: But before you get there, I just want to say that I do think that people, again, need to think about that, their goals. Often, there are too many people that when I ask these questions of “What do you want to do?” and all of this, they have no answers. They haven't really reflected and thought about it, and so really thinking about this may take time, but it's really powerful.
Grandma always said, “Eat your vegetables. Look both ways before crossing the road, and never risk your financial future on elements of the market you can’t control.” That Grandma, always good for some tried-and-true advice, and although some of her wisdom seems to have skipped a generation, you don't have to be left behind.
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Amanda: Yeah, I'm going to start off with an example I hear a lot. Let's call this person Jo. Jo plans to retire in 10 years. That's often when people start thinking about retirement. It’s when it's 10 years away. If only we thought about it earlier. [10:22.2]
But, anyway, Jo plans to retire in 10 years and has a goal of 10,000 per month of income. Rather than just calculating net worth, Jo might want to calculate projected monthly income and how it changes as Jo makes certain decisions about where to put her assets, how to pay off liabilities. All the “Am I doing it right?” kind of questions are going to be looked through the lens of “How are they impacting my monthly income? What is my monthly income? How is it changing?” [10:51.6]
Brandon: Yeah, some assets might not accumulate huge amounts, but are really great at providing income, right, for a period of time. I could see Jo's net worth not being as high as some might like, but if Jo is concerned with income and hits those income targets because of the planning and she knew her goals or he knew his goals, then they would be in a better position for them. Is high net worth even important in Jo's case?
Amanda: Next, what about Jess? Let's say, Jess wants to start a business. Jess might be more concerned with having a leap fund of liquid cash for leaving that W-2 job and might be looking very closely at “How much money do I have liquid and accessible right now?” or Jo [Jess] might be paying close attention to cash flow within the business, the timing of the funds coming in and out of the business, so that Jess knows “I could start paying myself a salary that I know is consistent, no matter the season of my business or how sales are going” and that kind of thing. [12:02.8]
The business itself might be really hard to valuate and put onto a net worth statement, but the amount of liquid cash and the cash flow of that business might be really critical numbers to Jess then deciding, Okay, it's time to take the leap and leave that W-2 job.
Brandon: And the funny thing is you mixed Jo and Jess there a little bit, but that's again thinking about us as individuals. It all is interconnected and mixed, and thinking through the scenarios, I don't know. But you mentioned Jo instead of Jess, I was just pointing that out.
Amanda: Okay, thanks for pointing out my mistakes, Brandon. Got to keep it entertaining here. Now, let's go into Jamie. Maybe next time I'll do people with different initials, but let's start with Jamie.
Maybe Jamie wants to buy a house and Jamie on the net worth might have plenty of assets to put down for a down payment, but if Jamie doesn't have the right debt-to-income ratio, Jamie might not be able to get any kind of loans from a mortgage broker or a bank to buy that home, and so it's not that just the net worth that's being looked at, but debt-to-income ratios and other factors, right, that mortgage people look at when you're buying a house. [13:13.8]
Brandon: Yeah, we've been in those positions and heard of people in those positions.
Amanda: Yeah, and then we've got Jordan who has a business at seven years old. Jordan is trying to grow that business, sell it in a few years, so Jordan plays very close attention to the golden egg number of profit, gross sales, paying close attention to what's coming in at the top, paying close attention to operating expenses, but mostly making sure that the business is showing a profit because anyone that's going to buy that business is going to know how much profit they’re going to make from it, and so, of all the numbers, that might be the one Jordan pays closest attention.
Brandon: Yeah. It's not that any of these people would not calculate their net worth. There just might be more important measures to add along with net worth, depending on their current goals. [14:02.8]
Now, you might object and say, My goal is to just be that millionaire to have a net worth of a million, or probably going to be higher in the future. We'd follow up and ask, What do you want that million dollars for? What are you going to do with it? And how is that going to end in the end?
Amanda: Yeah. If you just want that million dollars to sit there and do nothing, right, that's totally different than if you want that million to turn on and become income for you, or if you want that million to pass to your beneficiaries, your heirs tax-free, you're going to do something different than if you want that million dollars to go to charity, right? You have to know what that million dollars is for and have that then guide some of these other financial health measures and what happens there.
That's our take on this question, “Am I doing it right?” and “Is net worth a good measure?” In order to ask that question, remember, we believe you need to know not just your net worth, but also your goals and how you're tracking toward those goals. [15:07.5]
This might seem really gray and nebulous and hard to define like, Oh, you just made it even more overwhelming for us, thanks, guys. That's why we want to give you a methodology for getting clear on your financial goals and tracking your progress toward those goals.
We call it the STILL Method because it takes just a little bit of time to get still and focused on your financial path, so that you can find those right measures, those right financial health metrics, and you can learn how to track them to make sure they're helping you reach those goals.
To find out more about the STILL method and how you might answer this question, “Am I doing it right?” all you’ve got to do is visit STILLMethod.com. That's S-T-I-L-L, method, M-E-T-H-O-D [dot] com. [16:00.7]
Brandon: And some of this has come out of us, and you and me, really working this out over the course of building our business and drop dead fights and arguments and really good times, you know?
Amanda: Yeah, because if you've known Brandon and me for any length of time, you might know, we don't really care exactly how much money we have or what our net worth is. We've tracked it for years now, but just for fun. We care more about, are we enjoying our lives? Are we pursuing our passion? Are we making the difference we want to make in the world? And those, we have to track our money and make sure it's doing what we want it to do for us, and there have been all kinds of other metrics that have been more important to us than just “What is our net worth?”
Brandon: And making sure we're not going to be any kind of burden to our son or anything like that. We want to keep a good life as we get older.
We're going to ask next week or in two weeks a corollary question to “Am I doing it right?” We'll ask the question, “How do I then make progress? If I know my goals, what's the right way to move forward towards them? How do I make progress?” [17:14.8]
Amanda: Yeah, so until next time, keep building your wealth simply and sustainably, so you can break through to a smart, stable financial future.
The topics presented in this podcast are for general information only and not for the purposes of providing legal, accounting or investment advice. On such matters, please consult a professional who knows your specific situation.
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