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The Drivers of Net Worth

Couples that make it, and are happy, have what I like to call “sticky glue” between them. It’s the bond that keeps them together even when times are tough. What strengthens that bond is building toward common goals that make the couple’s life better — things like family, travel, or a new career path.

Some of the strongest sticky glue between partners is financial secur­ity because that’s what funds the future you and your partner want to create. When you don’t have financial security, or are building your own versions of it independently of each other, you’ll grow apart.

Couples become financially secure by building real net worth.

Rolling your eyes while reading this? Seriously, stop. I get that money matters can’t dominate the core tenets of your relationship; love, respect, trust, and intim­­­­acy do. But you need to respect the power money has in your relationship. It’s what rips people apart or pulls them together, and that’s fact, not fiction.

Couples become financially secure by building real net worth. Net worth is the amount of money left over when you subtract your liabilities (what you owe) from your assets (what you own). If you own a home worth $250,000 and have investments worth $25,000, you have assets that total $275,000. But let’s also point out that you owe $175,000 on your mortgage and have an outstanding consumer loan of $20,000. Your liabilities total $195,000. If you take your assets — $275,000 — and subtract your liabilities of $195,000, you have a net worth of $80,000.

Your net worth is what you’ll live off in retirement. It’s what supports your dreams of travelling, getting your master’s degree, or putting your kids through university. The greater your net worth, the more financial security you have.

Building net worth has absolutely nothing to do with how much money you make; it’s about protecting and keeping the money you’ve worked so hard to earn. There are thousands of six-figure-income earning households that, in fact, have negative net worth because they’ve spent every dollar they have. Meanwhile, some of our clients at MeVest earn modest five-figure incomes and still manage to grow their net worth by thousands each year.

A good lot of people spin a web around their life to make it appear as though they have a high net worth. For example, one of our clients came to us driving a brand new Denali, having newly renovated her home, and wearing a huge two-carat rock on her ring finger. Shortly after she arrived for her appointment, her husband rolled up in a Mercedes-Benz and Hugo Boss suit. By all accounts, Gretta and Tom looked rich. But their MeVest money coach quickly discovered the wealth they were showcasing for their friends, family, and colleagues was financed entirely by credit cards and lines of credit. All tallied up, their net worth was negative $235,000, and they were ready to wring each other’s necks.

In contrast, my savvy aunt and business mentor, a Toronto-based multi-millionaire interior designer, doesn’t necessarily look the part by driving a flashy car and living in a mansion. She drives a practical used Audi station wagon, carries a stylish Roots bag, wears second-hand jewellery, and travels in economy class. Unlike Gretta and Tom, she can afford her lifestyle. According to my Aunt Marian, not living how rich people “should” live, with expensive material possessions that don’t build wealth, has been critical to her financial success.

If you’re guilty of keeping up with the Joneses, you now have a choice — to live like a millionaire or actually be one. And along your journey to building your net worth together, just remember — the Joneses are broke.

Why Bother Tracking Net Worth?

Building your net worth starts with understanding where you are today. Your net worth is the number that we will focus on growing throughout this book. When you know where you are starting from, you can plan where you want to go. It’s kind of like hopping on that dreaded scale in your bathroom to see how much you weigh. If the number disappoints you, then you make plans to change your fitness regimen and diet. Every week you weigh in to see your progress relative to where you started. If you find your weight heading in the opposite direction of where you want it to go, you can quickly course correct.

The same concept applies to tracking net worth. Today you might jump on the net-worth scale and be disappointed about where you are, like Gretta and Tom, and see that significant changes to your financial behaviours are required. Or you might weigh in and discover that you’re satisfied with your net worth, and you simply need to keep up your regular financial-fitness regimen. On the opposite end of the spectrum from Gretta and Tom is my friend Sean, who paid off his mortgage in three years by sacrificing just about everything. Sean’s net worth is high, but at the expense of furniture, worldly experiences, and relationships. His house and heart are empty and he’ll need to make changes to his ultra-frugal financial habits to fill those voids.

The point is, when you take an honest look at your net-worth scale today, you can create a plan to grow your net worth through two actions. First, reduce debt like your car loan, mortgage, and credit card balances, and second, grow assets like your house, investments, or business.

When you know where you are starting from, you can plan where you want to go.

Did you know that people who track their net worth either on paper, with an app, or by way of a spreadsheet make greater progress on their money than those who do not? That’s because tracking your net worth adds an important layer of accountability to your net-worth goals. It forces you to face the financial music that you and your partner have created.

In his book What They Don’t Teach You at Harvard Business School, Mark McCormack references a 1979 study on setting goals conducted with Harvard MBA students. Students were asked, “Have you set clear, written goals for your future and made plans to accomplish them?” At the time of the study, researchers found that 3 percent of the participants had clear, written goals, 13 percent had unwritten goals, and 84 percent had no specific goals. Ten years later, people with unwritten goals earned twice as much as those without any goals at all. Individuals with clear, written goals earned 10 times as much the other two groups combined!

When you track your net worth, you’re more likely to accomplish the goals you’ve set to grow it. And if something goes off track, you can take immediate action to correct the situation.

Jump on It

Ready to jump on the net-worth scale? Let’s go!

If you’re a busy person, or if you’re using more than a simple bank account, keeping track of your money can be challenging. Many people have more than one bank or investment account, loan, credit card, or debit card. And when you layer on the fact that people often use multiple banks, passwords, and advisers, it’s even more confusing. Wade through it by laying all your most-recent financial statements — either electronic ones that you’ve printed out or the hard copies you’ve received in the mail — on your kitchen countertop. Also sign into your accounts online so you can have your current balances on hand. It also makes sense to open up your wallet and lay your debit, credit, and store cards on the table just so you’re not forgetting anything. Common statements include:

 Bank statements

 Mortgage statements/property value assessments

 Investment statements (from your bank, your RRSP, TFSA, or non-registered accounts)

 Credit card bills

 Loan and line of credit statements

 Pension statements

 IOUs (a rundown, handwritten if necessary, of money you owe to friends or family or that they owe you)

Once you have gathered your statements, begin inputting this information into a net-worth tracking tool. Not into designing your own spreadsheet? No problem, use Patrick and Morgan’s Net-Worth Tracker (see opposite page) as a template. If you’re uncertain which category to put a statement balance in, simply ask yourself this question: Do I need to repay this money? If the answer is yes, that balance is a liability.

Pay stubs, utility bills, and invoices for income are excluded from your net-worth calculation. They are used when budgeting instead (see page 48). Liabilities are different from bills in that liabilities are borrowed funds that must be repaid. Bills are paid monthly for goods or services — like your Internet or cable television service — delivered to you in a certain time frame. Bills should not be carried forward, whereas many liabilities, such as car loans and mortgages, are set up as regular payments over the course of many months. When a credit card balance isn’t paid off every month, it becomes a liability rather than a regular monthly bill. (A budget tool can be used to track monthly bills and income. Budgets and tracking monthly expenses are discussed in chapter 3, Scrap Your Emotions and Sort Out Your Accounts, and chapter 4, Curb Overspending.) Assets, on the other hand, are owned by you and grow in value.

Tracking your net worth is a simple four-step process.

Step 1: Start by marking the date at the top of your spreadsheet.

Step 2: Record each asset or liability and its value.

Step 3: Add up your assets and liabilities.

Step 4: Subtract your total liabilities from your total assets, and voila — that’s your current net worth.

Let’s take Patrick and Morgan, both 45 years old, as an example. They own a home valued at $550,000 and have a mortgage of $315,000. Last year they did a renovation and financed it through a home equity line of credit, which has a balance of $40,000. Patrick has an RRSP through work and Morgan has a defined contribution pension plan through her employer. Patrick’s RRSP is valued at $60,000 and Morgan’s pension is worth $50,000. They have three children and a Registered Education Savings Plan (RESP) valued at $45,000. The couple struggles to pay off their credit card balances, which total $6,000 split evenly between two cards, every month. Patrick and Morgan’s current net worth tallies to $344,000 when their total liabilities are subtracted from their assets.

Sometimes people don’t have any assets or any liabilities. If that’s you, simply put “0” as the value in the applicable category. If you don’t know the exact value of an asset, like your home or a collector’s item, you’ll want to have an assessment done or do market research on comparable offerings. Sometimes your hard-copy bank or investment statements won’t have the exact current value of an asset either. Simply call the institution where your bank account or investments are held and inquire about the current balance or check online.

Now it’s your turn to try it. Work through your stack of financial statements one by one, placing the name and correct value in either the asset or liability column. As a reminder: your net-worth tracker is an entirely different tool from your budget. A net worth sums up your total assets and liabilities whereas a budget captures your monthly income and expenses.

How do you feel now that you know what your net worth is? A negative net worth isn’t ideal because it means you owe more than you own. When you owe money, your options are limited — you either pay the money back or your lenders will harass you until you do. If you don’t pay them back, your credit rating will be impacted in a negative way, making it harder for you to borrow money at affordable rates in the future. But don’t worry if you’re staring at a negative number. This book will show you how to increase your net worth and change that negative into a positive, which will allow you to have greater choices and flexibility with your future. However, when you have a positive net worth you can continue to build savings for retirement, start a business, put a down payment on a home, pay for your wedding, or invest in your education.

Where Should Our Net Worth Be?

Almost every week I get asked “What should our net worth be?” The answer just isn’t that simple, because it’s based on what your goals are for the future. If, for example, you came to me and said you wanted to live on a beach in Bali and sell T-shirts for the rest of your life, I would tell you that you would need much less than someone who wants to take luxury cruises, play golf in warm climates, and shop for expensive jewellery in retirement. The person heading to Bali may need only $100,000 to live comfortably for the rest of their life, whereas the person heading down luxury lane would need closer to $4 million.

However, as a general rule of thumb, the average 30- to 50-something Canadian household will need approximately $2 million for retirement. So if you work that back, starting at the age of 25, and assume that as you age you’ll make more and can afford to grow your net worth more aggressively through asset growth and debt reduction, you would need to reach the following net-worth milestones at these ages:

Okay, I know that these numbers seem downright massive! But there are a few things that will work in your favour and push you much closer to achieving these targets.

1 Compounded interest and reinvested returns: The most powerful asset you have is time. The more time you have to save and invest your money, the more it will grow through the power of compounded interest and reinvested returns. Compounded interest and reinvested returns mean that you earn interest and returns on your initial investment (the principal), which is then reinvested, allowing you to earn more interest and returns on it. So now you’re earning interest and returns on the existing interest and returns. The more time you have to allow compounded interest and reinvested returns to actually compound, the more money you’ll have in the end.Think of it as piling rocks at the top of a mountain. You push the pile over the side of the mountain. On their way down, your rocks hit more rocks, which hit even more rocks. Before you know it, your little pile of rocks has started a landslide. That’s how compounded interest and reinvested returns work: as time passes, your portfolio grows into something quite huge and all you needed to do was gather those initial rocks at the top of the mountain.The longer you wait to invest your money, however, the less powerful compounded interest and reinvested returns are. Why? Because the less time you have, the less opportunity you give compounded interest and reinvested returns to compound themselves. Time is the magic ingredient that grows your money.

2 Mortgage as a forced savings plan: More than likely you will own a home in your lifetime. The act of repaying a mortgage forces you to reduce your outstanding mortgage balance, thus pushing your net worth higher every month. The only reason this would not work in your favour is if you borrow back the equity — typically through a low-rate line of credit or consolidation loan — you’ve put toward your house. I’ll introduce the pros and cons of using lines of credit and consolidation loans in chapter 5 (see page 69).

3 Inching your way to debt freedom: Every month you will reduce your consumer debt (debt that isn’t your mortgage) as long as you don’t accumulate more. Again, this builds your net worth through regular debt repayment. When you become debt-free, your cash flow will improve dramatically, allowing you to put more money toward assets.

4 Automation: Would you believe me if I said that you can build your net worth with your eyes closed? It’s true. Through regular automatic contributions to your investment plans and the outstanding balances on your debts, including your mortgage, you can watch your net worth grow without having to do too much. Set up the transfers to come out of your chequing account on payday, before you’ve had the chance to spend the money.

How Do You Want to Grow?

Now that you’ve laid out your current net worth, it’s time to give thought to how you’d like to see it grow.

Patrick and Morgan are starting with a net worth of $344,000. After discussing their goals for the next five years with their money coach, they learn that they are behind where they should be. Patrick and Morgan start to create a strategy to aggressively grow their net worth every month. The strategy requires Morgan to return to full-time work as a nurse. Currently, she works three days per week. Patrick will have to work toward becoming a foreman rather than a team lead at his roofing company to increase his income by at least 15 percent.

They’ve been big spenders for many years, and decide to cut back on out-of-country holidays, clothing purchases, and electronics for their children. They also agree to implement the Crush It debt-reduction strategy, which we’ll discuss in chapter 5 (see page 66). Their goal is to have a net worth of $625,000 by the time they’re 50, in five years.

Patrick and Morgan map out their plan by extending their net-worth-tracking spreadsheet over a five-year time frame. Then they calculate what each asset or liability balance needs to be in order to achieve their goals.

Patrick and Morgan have developed net-worth goals and “inked” them, which means there is a higher likelihood that they will achieve them than if they hadn’t written them down. More important is that they have a realistic plan to make it all happen. The plan requires them to change their spending patterns and earn a higher household income.

Each couple’s net-worth plan will be different from the next. Gretta and Tom, the couple with all the bling at the beginning of this chapter, would likely map out a plan whereby over five years they achieve debt freedom, bringing their net worth from negative $235,000 to $0. Still another couple, with a very modest income, could have a net-worth plan that brings them from $0 net worth today to $15,000 in five years. The point here is that your net-worth goals are yours and no one else’s.

Take a stab at extending your net-worth plan over five years. Don’t worry, the rest of this book will give you effective strategies to help make it happen, including advice on how to invest wisely, buy real estate, and pay down debt. But for now, outline your net-worth goals as realistically as possible. You can revisit and refine them later as you learn new financial strategies. Use Patrick and Morgan’s Five-Year Net-Worth Plan (see previous page) to get started.

Your household income is the primary fuel for your net-worth growth.

Congratulations! Setting some net-worth targets for yourself is the first step toward creating a rock-solid financial plan. I’ll show you other important components of your plan in chapter 11, Design Your Master Money Plan.

Fuel For Your Net Worth

You’ve probably figured this out by now, but your household income is the primary fuel for your net-worth growth. That means it’s pretty important to protect and try to grow your income every year. When was the last time you got a raise or bonus? Could you be working for a different company that pays more? Could you start your own side business? As we move through the remaining chapters, think about how you can expand the size of your household income.

Monitoring Net-Worth Growth

The best way to monitor your net-worth growth is to periodically update your personal net-worth tracker. At a minimum, you should check in every six months. For example, in January 2017 you might be worth $25,000, and in June 2017, $30,000, and on and on. If you find you’re getting off track, do some course correction and carry on.

Once you start implementing the principles discussed in this book, such as adopting the habits of truly wealthy people — and not those that just look rich but are actually broke — reducing debt, and growing assets, you’ll see that net-worth figure start to grow. There’s nothing more exciting than watching yourself get closer and closer to financial freedom.