Net worth is the most powerful indicator of wealth and the most important item for one to track to reach a true assessment of their financial condition. Net worth is the sum of all assets including stocks, bonds, retirement investment accounts, savings accounts, checking accounts, CD’s, cash, real estate, and vehicle value minus all liabilities including things such as mortgages, credit card debt, student loans, car loans, and other debts. This number paints the true picture of one’s personal financial condition. It is a figure that I track monthly to show progress and identify areas of improvement. Why is Net Worth such a powerful number to evaluate rather than for instance salary or income alone?
SALARY & EARNINGS MISLEAD
While it’s important to maximize one’s earning potential, income alone is only one half of the equation. Spending is the other half of the equation and it’s critical to live within your means so that one spends less than they earn. To emphasize this point, there are countless examples of brilliantly “rich” celebrities who have gone bankrupt. Despite their seemingly endless wealth which the layperson couldn’t even fathom how to spend, the following celebrities have been bankrupt at some point:
- Mike Tyson- despite career earnings estimated between $300-400 MILLION, Iron Mike managed to spend it all and then some claiming bankruptcy in 2003 with a net worth of -$23 million owed to his creditors.
- Willie Nelson- this classic country crooner declared bankruptcy despite his tremendous earnings over a 40+ year career in the spotlight of Nashville
- Terrell Owens- Career Earnings over $80 million weren’t enough to prevent the former star NFL receiver from running a hot route into bankruptcy proceedings
These few celebrities provide spectacular evidence that income alone isn’t the key to generating wealth. In addition to celebrities, there are countless high status, high income earners in fields such as medicine and law who have negative net worth despite making several times the annual income of the average American. Thomas Stanley provides great research highlighting examples of high-income individuals with zero savings along with years of research of what “made” millionaires in his book, The Millionaire Next Door. Surprisingly, income had relatively little correlation with the high net worth individuals since many of the high income folks spent every dime they earned.
Whatever your financial goals might be, I encourage everyone to track their net worth progress on a monthly basis. This provides an accurate snapshot of one’s true financial standing and will assist in making key financial decisions such as debt repayment, to buy a house or rent, and to assess whether one is ready to retire, among many others.