Ep # 52: What Is Your Net Worth and Why Is It Important To Know?

Benjamin Haas |
  • What is net worth? - 1:52
  • Not all net worths are created equal - 5:47
  • Tracking your net worth depending on your phase of life - 8:42
  • Why liquidity is important - 12:18



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Full Transcript:

Benjamin Haas  00:02

Hi everyone and welcome to A/B Conversations, where we will help you CFP your way out of it. A podcast where you get into the minds of a couple Certified Financial Planners on how we think and feel about everyday financial planning questions and what should really matter most to you. A healthier financial life starts...now! Hey, Adam. That is a very nice red shirt you have on today.


Adam Werner  00:31

Thank you and that's a very nice blue shirt you have on, Benjamin.


Benjamin Haas  00:36

A very passive color. On the other end of the spectrum, I think red is kind of like a, it's defined as like a power color. You're exuding power today.


Adam Werner  00:47

Yep, that's me. Always powerful.


Benjamin Haas  00:51

Seriously, I think it's actually a color of energy. I think that's how it's kind of defined but it can come off as an aggressive color too.


Adam Werner  01:00

So I'm going to let my shirt down on all sorts of friends today.


Benjamin Haas  01:05

Oh, look, we usually bring the energy to these podcasts. Today will be no different. I think we've kind of gotten into a groove on talking about client situations and a lot of the human side of what we do. We had an interesting conversation last week about a potential client that came to us and we typically on the front end, get a real deep look into who they are just by net worth and cash flow statements. So I thought it'd be good today, as financial planners, putting the behavioral finance side of things in a little box today. Let's talk about just real technical stuff. Net worth - what is it? Why is it important to financial planning? And how do we talk about it? Those would be my three things for today.


Adam Werner  01:52

Yeah, we're now switching gears from the behavioral side of things, the human side to the nuts and bolts of some numbers and situations.  I like that. I likened it to when you said we can get a feel for people based off of the net worth and the cash flow. I likened that to going to the doctor and they take your temperature; they take your pulse. A doctor can get a feel very quickly if something's out of whack or not or if things are in good working order. And I think, similarly for us, that's how we view, at least these two items at a very high level. So, let's just start with the baseline of what the heck even is net worth? What makes that up and then we can talk about what it actually means. At its basic form, net worth is just made up of your assets minus your liabilities for your debt. So assets being your home, your savings, any investments, collectibles, anything like that. That truly has value and then subtract any debts such as mortgage, student loans, car loans, credit cards, anything like that. Then you get to that final number and hopefully, that's a positive number.


Benjamin Haas  03:16

Yes, and I think that's why we track that as financial planners, right? Because it is really a measuring stick of financial health. So to your point, starting out early in life, maybe that's not a big number, maybe it is even negative, but that really sets the tone for how we give advice. It's okay to, it's natural, you have to take on some debt, you have to borrow some money to do some things early in life. I don't know a whole lot of people that can just buy a $250,000 or $500,000 home with cash when they're starting out in life. You have to borrow that but that's very different as a liability to us. Backed by an asset collateralized by a future asset, then going out and putting a lot of money on credit cards or things of that nature so it is a measuring stick early in life and it's also a measuring stick at the end of life. We talk about a state taxation when someone passes away and those formulas, whether it's at the state level or federal level, are based on what are all the things you own versus what are some of the things that you still owe?


Adam Werner  04:25

Yeah, and I guess that's one of the key components is that, when it comes to taxes, certainly income taxes is something everybody is familiar with, unfortunately. But the other side of that is the estate tax world and there's proposals right now that those numbers may change, but yes, that is definitely a let's call it a hard line when it comes to those equations. All of your assets, add them all up and the government is going to make some conclusions or some tax based off of those numbers.


Benjamin Haas  05:02

So I think that's why it's really important as financial planners that we do articulate assets as, like everything you own. I think in the investment management world, you get so tied up in, what do you have to invest? What do you have in savings and that kind of being its own measuring stick. There are lots of institutions out there that won't even work with you if you don't have X amount of investable assets. In our case, it really is to make sure that we're efficiently leveraging all assets in our life, whether that is property or businesses, arts, collectibles, private equity in something. There are so many different ways that people go about building networths that it's important for us as planners to be able to speak to all of it and recognize that as a part of your financial plan.


Adam Werner  05:47

Yeah, and I think that what you just said, there is the key, right? Not all net worths are created equal. You could have two people with the exact same net worth made up of very different assets, maybe you have somebody that has several rental properties that may not be liquid as opposed to somebody else that may just have everything, all of their net worth is savings and investments. So, two different ways to get to the same number but the real-life experience may be very different based on the makeup.


Benjamin Haas  06:28

Yes. So thank you for going there because that's the whole point here that I think us using it as a measuring stick is important for overall financial health. But everything we talk about in financial planning goes back to what does it need to do for you?  I think I used this example recently, if you have a million-dollar net worth and part of that is you own your home. You've got this beautiful, round numbers $500,000 property with farmland around here, lots of acreage around here in Kutztown Pennsylvania, you've got $500,000 in the bank. And to tie this into a retirement plan, we use the 4% rule withdrawal. Now you've got $500,000, 4% withdrawal, you're living off of $20,000 of income from that portfolio. You're a millionaire by net worth standards but do you feel rich spending $20,000 a year of your assets.


Adam Werner  07:25

Probably not.


Benjamin Haas  07:27

So that net worth is very different than hey, I don't own a property. I'm paying rent, maybe somewhere but I've got a million dollars in the bank and now I'm spending 40 or $50,000. Just to illustrate your point, not all net worths are created equal depending on what do you really want it to be doing for you?


Adam Werner  07:44

And I think that last question is so critical, right? When it comes to planning and we talked about this umteenth time, I don't know, too many times, I'll try to run with it.


Benjamin Haas  07:59

Be strong, be powerful with that red color.


Adam Werner  08:04

My vocabulary is great. That it's all relative. Everyone's situation can be slightly different. So the assets that they need or the makeup of what they have, can all serve different purposes. And our goal here, I think, for most people is just to efficiently align the assets that they have with the values that they have. But then actually what are they looking to accomplish? And let's just make sure that the assets that they have accumulated are going to fulfill that need over time and that there isn't a mismatch there.


Benjamin Haas  08:42

So my mind goes to, we can use this as almost like a conversation starter. For somebody younger in life, we're really looking to track their net worth over time to show progress. It's not just a snapshot in time where you start in life is not going to end. So paying down debt, saving on a regular basis, and then hopefully, seeing assets grow. Those are three ways that you're moving your net worth in a positive direction and it can also be a measuring stick for them earlier in life on when you take on debt. Really, are you doing it responsibly because every payment that you take on is now less money that you can have saved or less money that is really being utilized for other future goals. It's not just that net worth number but it's that net worth number and how does it tie into your cash flow?


Adam Werner  09:34

So even in this scenario where you take on more debt, obviously, if you're paying that from your income and cash flow, then yeah, there's less to be saved. But let's just say you do have some savings and maybe you're using a portion of that to help pay some debt. That just means those eggs that your golden geese are producing that you're eating them now and not letting those eggs turn into more geese in the future retirement.


Benjamin Haas  10:00

Bingo, right and we're not alone in being the only financial institutions that would talk about this. Debt to income ratio is something that's used by banks to make sure that you are not borrowing more than you should relative to your income. But with this often comes up and I know we've done recent podcasts on property ownership, right? If you're trying to own something so that you're creating an income stream with rental income, it still is to say that you have an asset and you have a debt, and maybe that's zeroing out and you're getting a rental income. But it is, again, is that the best use of your money for what you ultimately want to see and that is probably later in life having a paycheck that's recreated from savings or properties or something of that nature and not by your earned income. Let's flip. I'm leading into its asset accumulation. Don't take on too much debt. As you approach retirement, it's turning net worth into income, I think, right?


Adam Werner  11:07

Yeah, I feel like we just did a podcast recently on just recreating that retirement paycheck. How do you now take everything that you've accumulated all of these different assets, all different types, all different retirement accounts, non-retirement accounts, property, whatever it may be? How do I now flip the switch to now living off of what I have accumulated - my nest egg. I'll give the example. When we said not all assets that make up net worth are equal. Run the scenario where someone wants to retire early and we say early just based off of IRS law, 59 and a half is the earliest that you can get access to a traditional retirement account without a 10% penalty. So in that scenario, let's say someone can retire early, wants to pull the plug at 55 but the majority of their net worth is now tied up in a retirement account that they can't get access to without a penalty, that may not be the best spot for them to be saving if that is their goal or what they're looking to try to hit.


Benjamin Haas  12:18

Yeah, so I didn't even know that you were going to go there and it's a really solid point like, where are you saving where you have your net worth is important. Right? We'll go back to the example from last week too. Now I'm kind of like in the mode of retirement. Here we've got a gentleman and his wife who have looked to downsize, right, they've sold their home but now maybe looking to buy into a retirement community and while they have by my estimation, I mean, tell me if you feel differently, they have a decent net worth for their age. Half of it is tied up in annuity that they chose to purchase right out of retirement to create a consistent income stream for them, right, it was important at that time. But now having a lump sum asset to buy into this community, without that annuity, would be a really stressful thing for them. So it really is not just to take a look at that net worth but to your point, it's to take a look at what is that net worth made up of? And for us, it often comes down to what is liquid and what is not.


Adam Werner  13:23

I was going to say its liquidity is the key when it comes to matching up, you know, those assets of your net worth to what it can actually do for you in the future? It's can you get access to it? Can it provide an income stream? Something like that?


Benjamin Haas  13:40

Yeah, I was going to say what does it mean? What do we mean by liquidity?


Adam Werner  13:44

That you can actually get access to it and turn it into cash that is spendable in less than 30 days. You could have a house and theoretically you could put it on the market and you could sell it and in this market currently, maybe you could get something in less than 30 days but realistically in any normal market environment, if you really truly needed cash, listing your house and hoping for the best may not be what we would say immediately liquid.


Benjamin Haas  14:12

I mean you've moved in your life. How fun is it to move in less than 30 days?


Adam Werner  14:16

Oh, man, I don't want to do that.


Benjamin Haas  14:20

Liquidating a business. Liquidating even rental properties. These are things we wouldn't consider completely liquid. So I don't know I had the thought too to talk about net worth kind of at the end of life. I know I mentioned earlier it's definitely a measuring stick for taxes, estate taxes, inheritance taxes. But I think we often are fortunate to work with people that get close to the end of life and they go, hey, I'd really like to start gifting things in these last 20 years of my life, 10 years of my life. What can I afford to gift away based on my net worth and we use that as a measuring stick too.


Adam Werner  15:00

Yeah, so I feel like the theme I keep using here is not all things are created equal. So even when it comes to late in life and gifting, there are certainly different types of assets depending on where it's going. It usually comes down to tax ability and the gifting rules. What’s the most efficient way to whatever that dollar amount is to get either the charity or the person that value with the least amount of tax impact from the IRS. So for example, if you're gifting to actual individuals, human beings, cash is not a bad way to go when it comes to charitable giving. If you have appreciated stock, something like that, you can avoid some taxes and the end result to the charity is still the same, they're going to get that same value. That's not a bad road to go down. I feel like net worth for us as planners is this like, huge curve of life, like we started out with nothing, borrowing a lot of money, then you get to retirement, you got to feel like hey, I can confidently rely on this net worth for as long as I live. But in an ideal world for us because there are a lot of estate taxes out there, you've either spent it down to a reasonable amount. We make the joke all the time, you bounce your last check here on Earth, you did it right. Or if gifting or charitable gifts are a part of what you want to see happen. It's to make sure that we don't run out too soon. Net worth over different phases of life. I think the way that you put it to kick this off. It's a good measure of health for us relative to your phase of life, which is why it's something that we'll track with somebody on an annual basis. It's a report and every financial plan that we write.


Benjamin Haas  16:55

So I guess that means we have to talk about like cash flow and our next podcast, Hint, hint question mark, maybe?


Adam Werner  17:02

Sounds great.


Benjamin Haas  17:05

So I'll wear the red shirt in the next one, so that I can only talk about it.


Adam Werner  17:10

What if I wear white? Does that mean I'm just like giving up?


Benjamin Haas  17:14

No, it means you'll just blur into the background of your podcast background here.


Adam Werner  17:19

I won't do that then. Bold colors only.


Benjamin Haas  17:24

Hopefully, there's a lot of good that comes out talking about, you know, a very fundamental thing here and I know that we say this all too often. Do you have a healthy net worth? Is it going in the right direction? Well, it depends. It does all come back to financial planning and what do you need it to do for you but there definitely are some simple rules of thumb on how we would talk about net worth and hopefully we hit on them today.


Adam Werner  17:47

Yes, well said.


Benjamin Haas  17:50



Adam Werner  17:51

All right.


Benjamin Haas  17:52

Thanks for the help again. Hopefully you have a wonderful, wonderful rest of your day in your red shirt.


Adam Werner  18:02

And to all of you listening out there. Enjoy your day.


Benjamin Haas  18:19

Hey everyone, Adam and I really appreciate you tuning in. Please note that the opinions we voiced in the show are for general information only and are not intended to provide specific recommendations for any individual. To determine which strategies or investments may be most appropriate for you. Consult with your attorney, your accountant and financial advisor or tax advisor prior to making any decisions or investing. Thanks for listening!

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