The Canadian Money Roadmap
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The Canadian Money Roadmap
What's your net worth?
On this episode I discuss all things Net Worth.
What is your net worth?
How do you calculate it?
What are some things you can learn from your net worth?
It's not just for celebrities or old men. Your net worth will help you guide where you can focus your efforts to improve your finances today and long into the future.
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Hello and welcome back to the Canadian Money Roadmap podcast. I'm your host, evan Newfeld. On today's episode, we're talking about all things net worth. What even is your net worth? How do you put it together, and what can you actually learn from putting together your own net worth statement yourself? Before we get too far into the episode today, if you've never calculated your own net worth or this is kind of a new concept for you or if it's something you have done before and you want to do it a little bit more thoroughly or look at a few other things, i have a spreadsheet that you can download in the show notes of this episode. Here It's called your full financial picture. Now, this spreadsheet has a whole lot more than just your net worth. That's pretty comprehensive. Obviously, it's your full financial picture, but a few different pages on there will help you calculate your net worth, and throughout this episode I'm going to be talking about the things from that spreadsheet. If you're new to the podcast, here I do not do advertising. It's something that I've always wanted to avoid, but at the same time, there are costs of operating this thing, and so I do have a small nominal charge for downloading the spreadsheet. It's only five bucks and the spreadsheet. You could probably build it yourself. You'd probably take about five to 10 hours to do it yourself, or you could pay five bucks and get it right away And you can have it all done and ready to go and helps keep the podcast free for everybody and add free in particular. So thanks so much in advance for all of you that are going to download it and the dozens and dozens of you that already have. That's pretty cool. So what is your net worth? This is something that you might have seen online through websites like celebrity net worth and all these goofy things. When you try to figure out how much money somebody has, it seems kind of like a rich person thing or like an old man thing to deal with. But a net worth is just trying to figure out what you own and what you owe in terms of your debt. So in our language here in the finance world, we call those your assets and liabilities. I'm going to break that down a little bit more in a second. But your assets are just things that you own and your liabilities are your debts. You could really get into liabilities if you wanted to talk to an accountant and you could figure out how you could calculate ongoing payments and figure that as a liability. I really keep it simple there and look at things like your maybe your student loans, your mortgage, car payments, those kinds of things as your liabilities. But yeah, today's episode we're going to be talking about all things net worth And so the language of assets and liabilities that will keep coming up here. But those are just in reference to things that you own and things that you owe. So let's break those two categories down a little bit more. On the asset side of things, there's generally two main categories and on the full financial picture spreadsheet, if you click on the assets tab, you will see categories for fixed assets and liquid assets. Liquid is kind of a goofy term, but all that means, in the way that I explain it to clients, is that your liquid assets are the things that you own that you can spend and spend quickly within the next few days. So, for example, if you had a TFSA balance or an RSP balance, you probably don't want to spend them, but you could. You could withdraw that money from the stock market or from your mutual funds or ETFs, whatever relatively quickly and you could spend that money. Obviously, your checking account, your savings account, your emergency fund, your RSP plans at work. I count those as liquid assets as well. Those would all be things to consider there. So again back to the full financial picture spreadsheet. If you click on the accounts overview tab, this is where you can get really granular. I like doing this for a few reasons because it keeps everything straight. I can kind of keep track of where everything is, and then, once I put it in there, it's really easy to update the numbers If I do this every year, every quarter or something like that. So on the left side you can categorize each account as either a checking account, a savings account, tfsa, rsp, non-registered investments, anything else, any other account type under the sun, and then on the assets page it'll add everything up for you, and so you just put everything that you possibly have in there, what type of account it is, where it is don't put your account numbers in there just for privacy, of course And then the current value of these things, and so that will tell you what you have in your liquid asset category. So again, these will all be things like your cash, your savings and your investments, and our spreadsheet will break all of those down for you and so that you can see them highlighted nicely on the assets page. Now, fixed assets are things that you own that you can't spend. So you can't spend your car, you can't spend your house, you can't spend shares in your personal corporation you know if we're getting complicated there And so those things are worth listing as assets, for sure, but they're worth listing separately because you don't have any sort of income flexibility or spending flexibility with those And it's a little bit more complicated to offload them and turn them into something that you can actually do something with. So on the assets tab, you can list all of your fixed assets there. You can name them. I of my principal residence, you got a couple of vehicles and RV and shares of my private corporation And then you can put in your market value in there And again, it'll automatically add up all of your fixed assets for you. In addition to that, the another type of fixed assets would be things like personal items. So if you own things that are particularly valuable, like jewelry or artwork or a collection of some sort, you can list that in there as well. I would refer to most of those as fixed assets And in some cases even their own category, because it's easy to find a buyer for a home or a car, but it's pretty difficult to find a buyer for a very specific baseball card collection or a unique artist. Even though those things have value, the number of buyers for them is very limited. Yes, they're worth listing on your net worth statement, but just keep in mind that those things make your net worth more complicated and less flexible. So having a good breakdown of where your assets are between those categories of liquid and fixed and even personal items will be really valuable for you to highlight, perhaps, where you could add some diversification. If you have too many fixed assets, you could focus on things like building up your TFSA or RSP balances to coincide with the balances that you have in other fixed categories, like perhaps rental properties, or maybe your primary residence is the main component of your fixed assets. Now, on the other side of the net worth statement, are your liabilities or your debt. Most people have a pretty decent handle on these things, but we've broken them down in the spreadsheet here. If you click on the liabilities tab, there's two different sections there. One is for long term liabilities, so these are things that you're going to be paying off for more than a year In my case. I've got a mortgage on there, a car loan and a business loan here for the firm that I bought into. I have a payment that'll be ongoing for a number of years, and so I can keep track of what my payment is, any sort of interest rate and the remaining principle on that loan, again just as a place to put everything, so I know where it is and I can quickly see what I have outstanding at any given time. Now, short term liabilities would be another thing, and these would be things that you have owing that'll come up in the next year or less. Credit card would be something that I put in here. I never would have thought that I'd have to talk about this too much on the podcast, but payday loans I would definitely put those on here. I have a scorecard that many of you have completed and on that scorecard I'm just talking about your financial situation and trying to find out for yourself the things that you should focus on. If you've never done that before, take a look in the show notes and you can do that scorecard for free. But 23% of people that have completed that scorecard have said that they've taken out a payday loan in the past. That was a really surprising number for me, and so I'll try to keep that in mind when creating content in the future that these things are out there and they're perhaps a little bit more mainstream than I thought. So if you have something like that or another high interest loan that has a shorter timeframe, you can put that into the short term liability section And again the spreadsheet will do all the hard work for you and add it all up and categorize everything for it. Really slick Again the spreadsheet's five bucks. It's a pretty good tool for a really cheap. I recommend you take a look at it. Okay, so once you've kind of gone through all of that for yourself and you've added in all of your financial accounts, which would be your cash and your savings and your investments, added in your other assets under the assets tab, filled in all of your liabilities Again, that's, your debt and the liabilities tab Head back to the net worth and account summary tab And this is where you can start to get a little bit more information about your total picture. So at the bottom of that page you will see a total net worth. If this number is positive, awesome. That's a good first primary goal for evaluating your net worth. For many people that are just getting started or they're just graduating from school, having a positive net worth is very challenging And that'll take some time to get there. As you pay off your debt, as you pay off your mortgage, all these different kind of things, don't worry about it if you're currently in a negative position because anyone that's already doing something like this or tracking their net worth. You are so many steps ahead of the average person that, even though that number might not be positive today, you are already demonstrating the steps that you should be taking to move your net worth in the right direction. So don't worry about if that number is negative, but if it is positive, that's awesome. So on this page the net worth and account summary you can take a look and see how much of your assets are broken down by fixed assets, liquid assets, long term liabilities and short term, and then from there we could start looking at a few more specifics and maybe some ratios to figure out your overall position. So, again, the first thing that you should look at is just the total number. Is it positive? And ever increasing net worth is probably a reasonable goal to have, not that you want to keep making the pile bigger or have you know material richness as a primary goal in your life perhaps it is for you but you know your net worth tells you a whole lot more than just that, i guess. But I guess my point here is that I don't want you to be consumed by this being the primary thing that you spend your time and mental energy on. It's good to have a good handle on it in general, but there's more to life than just your net worth. This isn't your existential worth, but this is a conversation for another time. I'll stick to the numbers here, but just wanted to throw that out there. So if you're looking for some specific learnings from your own net worth statement, here are a few things that you could be looking at. I don't have it built into the spreadsheet, but you can just do some quick math on a calculator on your phone or whatever And you can figure these things out. So the first one would be your debt ratio, so how much debt you have. So that's total debt or total liabilities divided by total assets. Again, total debt divided by total assets. So if this ratio, or this number that you get there when you do that is greater than one, that means that you currently do not have enough assets to pay off your debts. This is not a situation that you want to be in. I would say you better hope you have a stable job and a really good disability insurance policy in case you lose your job outside of something that you can control, and so, on the other side of things, a ratio below one means that your assets are worth more than your debts. This is the number that you want to aim for, and you want that ratio to be lower than one and constantly dropping. If that number is below 0.5, that means that you own more of your assets than the bank does, or something. Whoever your lender is, just on average, you own more of your stuff than anybody else. That's kind of a weird thing to think about there, but getting that number below 0.5, that would be a great target to have. Obviously, 0 would be awesome too. That means you don't have any debt. Debt isn't all bad by any means, but it makes things just more challenging. A second ratio you could be looking at to determine something interesting from your own net worth statement would be on the asset side of things, so specifically your liquid to fixed asset ratio. If you're a homeowner in Canada, the vast majority of you and especially if you're a younger person, the vast majority of your net worth is probably going to be tied up in your home, especially if you have a large mortgage payment and you can't afford to invest elsewhere. So for someone that's a homeowner in Canada, a liquid to fixed ratio of over one would be pretty amazing. So if your home's worth a million bucks and you have a liquid to fixed ratio of one, that means you also have liquid assets of cash, savings and investments, also of a million dollars, that would be fantastic because that shows a really high level of asset diversification and also tells you a little bit about how flexible you can be with your spending. Because, again, your fixed assets are things that you own that you can't spend, but your liquid assets give you all that flexibility to go on the trip to buy the new thing, to give away to somebody else or whatever you want to do with your cash, especially going into retirement. Increasing your liquid to fixed ratio would be a really great goal to have. Mine is currently abysmal, because I own both a business and a home here in Canada, and so the primary bulk of my assets would be fixed, and so my goal for this year was to increase my level of liquid assets. Buying a new house halfway through this year has made that goal a little bit more challenging, but hey, anyways, we're all rolling this together and we're all kind of dealing with the same types of challenges. One last thing that you can be looking for in your own net worth statement to learn something about your own financial life is to look at your liquid assets and short term liabilities In the financial world, like when we look at stocks or evaluating companies. This is called the current ratio, so it's your current assets for your current liabilities. It's a little bit different in this world, i guess, but I'm specifically looking at your liquid assets and short term liabilities. So that would be think of it like your cash on hand versus your credit card balance, and so if you have a credit card balance that you're not paying off every month but you have cash on hand, i would say, hmm, this is something that could probably tweak something in your mind to say maybe I should pay this off because short term liabilities, so your credit cards, any other high interest debt tool, payday loans the cost of these things is crazy. The interest rate is very, very high on short term debt. Most credit cards are in the ballpark of 20% or worse. Payday loans are in the hundreds of percent when you actually do the math on an annual basis. It is crazy. And so if you have any of these kind of things on your net worth statement, i would highly recommend that you take a look at your liquid assets and see if it's worth paying those off with the cash that you have on hand. Even if you're trying to save for a longer term goal and things like that, sometimes the cost of maintaining those short term liabilities is just not worth it. Again, this is my plug to tell you that if you have any sort of credit card debt, please pay it off as soon as you possibly can Best financial tip you can ever have. Okay, so now let's just talk a little bit more high level about why you should bother doing a net worth statement for yourself and some things that you can learn. Number one your overall financial health. So it really gives you just a snapshot of what's going on with your finances right now. So by calculating your assets and your debt, you can determine whether you're positive right now or negative. That is just kind of like a really high level. Look at yourself in this moment and gives you again a high level goal of improving from there, because you'll improve your net worth by both paying down debt and increasing your savings. So by focusing more on the net worth you'll be able to see the benefit regardless of which path you choose between building your assets or paying off debt or both. Number two you can kind of see your progress that you make on the wealth accumulation side. So once you've kind of have enough capacity, start building wealth, either through real estate in your home or other real estate or stocks, even just some cash savings, just starting to build something. You can start comparing yourself from periods of time in the past and you can see if that's increasing or decreasing. So if you see a consistent increase in net worth, you can look at the different categories of your net worth and you can see what parts are increasing and what parts are decreasing, and then you can kind of learn a little bit from there. Number three you'll be able to quickly see things like your asset allocation. I've talked about that in the world of investing So specifically in mutual funds and ETFs and building a stock and bond portfolio, but even just in your overall financial life. So you can see what you have in terms of cash investments, real estate in your business and all your other debt too. So if you have the primary bulk of your assets or like in your car or something like that, that would be a little bit eye-opening. But until you have it on paper, it might not be as obvious to kind of see where all of your stuff is. True, diversification takes a look at all these things in your own financial life and not just what you own as an investment in your TFSA. Again, this type of analysis kind of pointed me towards focusing on building up more of my liquid assets this year through my RSPs and TFSAs, because I have plenty of exposure now in the real estate world. Number four it gives a really good look at your debt in total, so provides a little bit more visibility there, including what you all have and all the different places you have it. If you write it down according to the spreadsheet that I built there, you'll be able to see what your interest rate is. Again, you have to manually do this. The spreadsheet doesn't know your life, but it means you have to put this in, but once you see it on paper, you'll be able to see what debt is costing you the most per month And then you can kind of come up with a strategy to pay down that debt. And by paying down that debt you reduce your interest costs and allows you to pay off more debt or build more assets and increase your net worth. There we go. Number five this kind of looks at a few of the things that we've already talked about, but it allows you to identify your financial strengths and weaknesses. So, for example, if your net worth is primarily driven by the value of a single asset, like your primary residence or maybe your business, you might want to consider diversifying your investments to reduce risk or focusing your energy on something else. On the other hand, a weakness would be if you have significant investments already but you carry a lot of high interest debt. You could focus on reducing your debt to improve your financial situation. Number six going through your personal net worth can help you set your financial goals. I'm a big believer in setting some goals, or even if you don't like goals and you think that's a bit of a corny term that our industry uses, which in some ways. I totally believe that I kind of like the concept of areas of focus for a period of time. Goals are kind of this aloof term, and a lot of research that's done on goal setting finds that most people, including financial planners, don't actually have goals. It's just something that we've created as this concept that we think people should have, or that they sit around thinking about all these specifics in their financial life. No, they kind of want a little bit more generality. That's where the idea of areas of focus might be a little bit more valuable. When you're setting your financial areas of focus or goals, whatever you want to do, looking at your net worth statement can help identify those areas that you want to improve, such as increasing your investments, reducing debt, building your emergency fund. Maybe you have five TFSAs. When you look at your account overview, it's like, hmm, maybe simplifying these areas of your life might be simpler. Maybe just do one. I would recommend that. Anyways, that's what you can do. You can just have a look at those kind of things at a high level. increasing your net worth is great. Looking at some of those other ratios that I talked about before, improving those would be a great goal to have as well. So, anyways, net worth is something that is commonly misunderstood, i would say largely because of the celebrity net worth culture that exists on the internet. If you type in any celebrity's name, the suggested Google search is probably so-and-so's net worth. This is stupid in my mind, because no one really knows anything about these people And the net part factors in the debt that they have. So it's one thing to say, oh, so-and-so signed this contract for $10 million and they signed the next one for $5 million, and they just start adding up all these numbers of like cash flow they should have received over the years. I have no clue what they use those to buy or what debt they have, or whether any of that cash is still around. Maybe it's all been spent, who knows? Anyways, if you go into the show notes of this podcast or you go into any spreadsheet of your choice, do whatever you want, do this on paper, but just start writing down a list of what you own and what you owe and have a look and see what stands out to you Again, some of those things that you want to look for at a high level. Is your net worth positive? Do you own more than you owe? That's awesome. Within that you could look at your debt ratio. So that's kind of the inverse there of your total debt divided by your total assets. Get that number below 0.5 and dropping regularly. That would be awesome to have. Next one would be your liquid to fixed ratio. This looks at your financial flexibility. Again, i would prefer maybe this is more preference than anything, but I would prefer to have a higher liquid net worth than a fixed net worth, because I can actually do something with a liquid net worth. Finally, have a look at the breakdown between all your different assets and liabilities and see if you find any gaps there, or things like your short-term liabilities, and see if those could be funded by some of the other asset categories that you've listed off. Coming up with your net worth statement and the insights that you can get from it. It's not rocket science, but there's so much in the world of finance that comes down to realizing things. After you've spent some time looking at them, you might know it to be true, you might think you know what you have, but until you have it down on paper or on the computer screen, you might not have fully comprehended what that actually means for you. So the things that I learned from myself going through this exercise that my fixed asset figure, my liquid to fixed ratio, was way lower than I wanted it to be, and so my area of focus for the next year is going to be trying to increase that number. Anyways, if you like really practical episodes like this, i'd love for you to drop me an email. My email is always in the contact info of the show notes. Again, if you want to walk through this exercise along with us on this episode, once you get back home, if you're listening in the car or whatever, have a click on that link down below. That's for your full financial picture. And again, it's just five bucks and it helps keep this podcast free for everybody And it allows me to keep doing it and keep the ads on other people's podcasts, because I've got great supporters that want to keep this thing going for others. And thank you so much for all of you who have supported the show. It blows me away that there's so many of you out there listening and getting some value from this podcast every single week. So thanks again for that And we'll see you next week on another episode. Thanks for listening to this episode of the Canadian Money Roadmap podcast. Any rates of return or investments discussed are historical or hypothetical and are intended to be used for educational purposes only. You should always consult with your financial, legal and tax advisors before making changes to your financial plan. Evan Neufeld is a certified financial planner and registered investment fund advisor. Mutual funds and ETFs are provided by Sterling Mutuals Inc.
