Tracking Your Path to Financial Independence: Net Worth
Meet Elaine
Elaine was born and raised in B.C.’s Fraser Valley. Aside from the four years in Vancouver that she spent at university, she has spent her entire life there. She has never married or had children, so Elaine always felt she had to be prepared to take care of herself. Fortunately, as much as her parents believed in education for Elaine and her older sister and brother, they also encouraged practical skills that would allow each of them to manage their lives with confidence, including financial matters.
Net Worth: The Most Important Metric
One of those financial matters that Elaine’s parents emphasized was net worth. While they also talked about cash flow, and getting into a career that she was good at and paid well, a part of that income needed to be saved and invested if it was going to provide her with any financial stability.
As Elaine learned, tracking net worth is the most important aspect of personal financial management. It gives you a comprehensive view of your financial health. Unlike income, which measures how much money you earn, net worth reflects the total value of your assets minus your liabilities. Sure, a high salary can provide a comfortable lifestyle, like nice clothes and vacations to exotic locations, but it doesn’t guarantee financial security if you just spend more and allow your debts to increase as well. By focusing on net worth, Elaine saw her assets grow faster than her liabilities, leading to the sense of financial independence she feels today at age 60.
One of the key reasons why an increasing net worth is more important than an increasing salary is that it captures the overall financial picture, including savings, investments, and debt management. Elaine’s dad emphasized investing when she first started earning an income while her mom was strong on saving and minimizing debt. She could almost hear them say, “A higher salary might lead to higher spending, and then what will you have to show for it?” So, whenever her salary increased, she made sure that she always maximized her RRSP and her TFSA, too, when that came along. When she finally bought a modest house for $130,000 back in 1999 at age 35, she nearly choked on the 6.80% interest rate she had to pay on her $97,500 mortgage. She wanted to pay even more for her down payment, but her parents also encouraged her to be diversified and not put everything into her house. The pain of paying the mortgage eased as the interest rates steadily declined while the value of her home steadily increased.
Net Worth Over Time
A net worth statement by itself is just a snapshot that doesn’t say much by itself. However, when Elaine started tracking her net worth in earnest, which was when she bought her house, she saw how it gained meaning for her when she saw how her net worth grew year after year. Well, to be honest, Elaine acknowledges that her net worth actually went down in 2002 thanks to the tech sector coming undone, again in 2008 when the Global Financial Crisis hit, and most recently just a couple of years ago when inflation showed up. But she also saw how her net worth went up, several times by more than 10%, in most of the other years.
Breakdown of Elaine’s Net Worth Statement
Assets
Cash and Equivalents
Elaine has always tried to maintain a fairly modest chequing account so that she can put most of her savings into assets that will generate returns. To that end, she has always looked for a high-interest savings account (HISA) in which to keep her emergency fund. This fund represents the equivalent of six months of Elaine’s spending.
Investments
The Tax-Free Savings Account (TFSA) did not exist before 2009, so whenever Elaine maximized her RRSP contributions, she would put extra savings into a non-registered account. From 2009 onward, she did not add any more to the non-registered account but let it continue to grow, occasionally withdrawing from it to fund a new car purchase or some other major expense.
Elaine has always chosen to contribute the maximum available to her RRSP. This typically worked out to about 8% of her annual earned income.
Employer-Sponsored Plan
Throughout most of her career, Elaine has been in a job in which she contributed 5% of her salary, which was matched at 5% by her employer. Even though the returns have been less than stellar given the limited investment options provided by the custodian of the pension plan, she is grateful for having a pension plan as many of her friends do not.
Property
Residential property prices were at a low ebb in BC back in the late 90s. Interest rates were still high in those days. That situation changed dramatically, especially in the last 10 years. With her home currently valued at nearly half her net worth, Elaine feels a little bit overloaded on real estate at the moment, so she often leaves the value of her home out of her personal net worth calculation. Doing so reduces her net worth to $895,050, but even if it doesn’t reach the magic one million dollars, she still feels rather good about where she is right now.
Other Assets
Elaine has always driven used cars and paid cash for them. She will typically use her non-registered account to save the necessary cash. Over an eight-year cycle, the expected lifespan of any car Elaine buys, she slowly builds up a cash reserve that she keeps in an investment savings account (ISA) within the non-registered account.
Her personal property does not extend beyond her furniture, some musical instruments, and some art that she bought on occasional trips abroad.
Liabilities
Long-Term Liabilities
Since Elaine pays off her credit card in full every month and doesn’t have a line of credit, she doesn’t record any short-term liabilities. As already indicated, she always pays for her vehicles in cash, and by age 35 her student loans were long paid off. Her only debt has been her mortgage and that has been paid off as of 2024.
Elaine’s Net Worth
After subtracting Elaine’s liabilities from her assets, she is left with her net worth. A relatively modest net worth of $160,500 in 1999, when she was 35 years old, has grown over the subsequent 25 years to a shade over $1.6 million.
As mentioned earlier, the value of Elaine’s home has grown to assume an increasingly substantial part of her net worth, which she does not necessarily regard as an ideal situation. However, with the cost of housing in the major cities these days, at least in certain regions of the country, this situation is hard to escape. This simple chart is an illustration of Elaine’s net worth with and without her home. For many, the difference may be even more pronounced.
Tracking Your Own Net Worth
As I have noted above, tracking your net worth is an important tool to help understand how your household wealth is trending. In this blog post, I have made it simpler by illustrating the net worth of a single person. In the case of a couple, you may need to create four columns for each year: Spouse 1, Spouse 2, Joint, and Total. Alternatively, you may simply add additional rows: Partner 1 Chequing Account, Partner 2 Chequing Account, Joint Chequing Account, Partner 1 RRSP, Partner 2 RRSP, Partner 1 TFSA, Partner 2 TFSA, Joint Non-Registered Account, etc.
This is not something that you need to do every month, either. Once a year is sufficient, in the week or so after the new year when your December 31 statements arrive. The important thing is to keep on with the task annually and see how your assets and liabilities change. No doubt you will add new rows when new accounts are opened or a new borrowing facility is established. If you have closed an account or paid off a debt, just set it to zero. Personally, I have tracked our household net worth on an Excel spreadsheet since 1996. You don’t need to use a Microsoft product, though. If you are partial to the MacOS, you can use the Numbers spreadsheet that is part of the iWork office suite. Or you can use the Google Sheets spreadsheet available through the Chrome browser. In fact, if you just do an internet search for a net worth spreadsheet template, you will be able to find something that suits you with very little modification required.
Happy tracking!
This is the 255th blog post for Russ Writes, first published on 2024-07-22
If you would like to discuss this or other posts, connect on Facebook, Twitter aka X, LinkedIn, or Instagram.
Click here to contact me for an appointment.
Click here and select FinPlan30: Financial Planning in 30 min under Specific Questions for a 30-minute free no-obligation financial planning conversation.
Click here for a 2-week free trial of the Money Architect Financial Planning platform.
Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax, or legal decisions.