A co-worker of mine once said to me, “If you don’t measure it you don’t know if you can improve it.” Although he was showing me his new GPS sports watch and referring to his 5k time, the same can be said about almost everything. Want to know if a business is getting more capital efficient? Measure its efficiency by looking at things like return on capital employed and rate of return. For ourselves as savers, who are looking to grow our total net worth, we need to measure our savings growth on a regular basis.
That is why in this article we are going to be reviewing what I call a Wealth Check-in. This is where we go through all of our accounts and put in balances. We’ll then go through and put in debts, home values, car value, and potentially even things that are contingent like stock plans that vest out over years from work.
What Is A Wealth Check-in
A Wealth Check-in is a way for us to measure our progress in building wealth. We do this by making a list of all of our accounts no matter how big or small, all of our debts, loans, credit cards, and our major assets (car and home) and then add the value together so that we can figure out exactly how well we are doing at saving.
The Wealth Check-in will give us both a snapshot view of our wealth today, exactly as it stands, but it will also give us a perspective through time. This is important because it is easy to try and trick yourself by only looking right after a pay check or before you pay bills for the month or when the stock market has had a couple of big days – we need to be honest with ourselves.
Why Do Wealth Check-ins
We do Wealth Check-ins because although we may have a general feeling for where our net worth is very few people can really tell us their exact number at any given time when asked to include trading accounts, retirement accounts, loans, home value, and more. This is especially true as you get older and the number of accounts increases. When you only have a general idea on where your wealth stands it is easy to look at the work that we did on our reverse budgeting exercise and think that it is going up by a certain amount every month. When you do this for too long it is easy for there to be a slow leak resulting in you not saving as much as you think you should. We need to understand if our savings matches our budget.
Wealth Check-ins help understand and monitor the following:
- How much cash we have access to at any given time should we have emergency expenses
- How much we are saving for retirement and how our retirement portfolio is performing
- How much of your retirement is in a company plan vs. personal plans
- How much debt we have, how much equity we have, and if we’ll be eligible for refinancing
- How consistently we are paying down the principle on loans
- What we might be leaving on the table should we change jobs
We also want to make sure that we do our Wealth Check-ins on a regular basis, preferably on a monthly basis. We want to do these regularly to make sure that we understand if there is any seasonality in our savings, but also to make sure that we don’t fool ourselves by checking in only right before we pay bills or right after the market has a good run. This is especially important when your bills are high relative to your net worth. Once you start doing this on a year-over-year basis you can see the effects of things like annual bonuses, taxes, and the cost of buying and selling cars and homes.
Finally, we want to do our Wealth Check-ins so that we can make sure that we are steadily improving through time. Wealth Check-ins can help you recognize if you have money in accounts that don’t provide interest, have high fees, or are otherwise unhealthy for our finances.
How To Do It
Okay, so now that we understand the value of doing a Wealth Check-in let’s go through the steps of actually doing one. The steps are:
- Make a list of all your accounts, including savings, checkings, retirement, CDs, and brokerage accounts (i.e., stocks and bonds)
- Make a list of all your credit cards and other short-term loans
- Make a list of all your major assets such as homes and cars
- Make a list of all any loans associated with those assets
- Make a list of any unvested company compensation like stock option plans or restricted stock
- Optional: If you happen to collect things like art, rare coins, jewelry, or other items that have significant value you can include these as well – but be cautious – only value them at the value you could actually sell them for. I advise against including these, but for some people it may be relevant.
Now that we have our list of accounts, we need to put them into a spreadsheet (like Excel or Google Sheets) and enter in balances on a given date. Below is a snapshot of a Wealth Check-in spreadsheet for the first seven months of 2018.
We will split our sheet up into three sections:
- Section 1: Cash, Savings, Retirement, and short-term debt (items 1 & 2 above)
- Section 2: Assets and long-term debts (items 3 & 4 above)
- Section 3: Contingent amounts (item 5 above)
For Section 1, you can see that we entered account balances for our checking, savings, retirement, and brokerage accounts as positive numbers, and our credit card balances as negative numbers. We do this so that we can add them all together to calculate the “Total” line in our sheet. You’ll also notice that I have a “Retirement” line that is just the 401(k) and IRA added together. We do this because it is important to know how much of our wealth is tied up in retirement accounts that we should avoid touching before we retire or else face big penalties.
I also have a line labelled “Monthly Gain”. This line is calculated with the formula:
(Current Month Total – Previous Total)/Previous Total
This line is so you can track if you had a positive or negative month. However, positive and negative months can be misleading when taken out of context. They can be over-encouraging if you got a one-off bonus or if the market had a good run. They can also be discouraging if you had extra bills or a bad few days in the market one month. That is why we also have a line for “Total Gain”, which is calculated by:
(Current Month Total – First Month Total)/First Month Total
This allows us to see how our wealth has grown through time. This is an especially fun line once you have been tracking for about 10 years and you look back and see what was $5,000 has grown by a few thousand percent and is now $150,000 or even $1,500,000!
For Section 2, I have assumed a simple case of one house, one car, and a loan for each. If you have rental properties and multiple cars this can become quite a big section, but I wanted to keep it simple and easy to understand here. The debts go in as negative numbers and the assets go in as positive numbers. “Total Debt” is just the sum of the debt lines and “Total Equity” is the value of the assets. “Debt/Equity” is just your Debt divided by your equity, and “Net Equity” is Total Equity less the Total Debt.
Total Debt is important because it allows us to understand how much we owe, and how we are doing at paying off those loans. If your savings is going up quickly and debt isn’t changing then maybe you should shift some savings toward paying down debt – especially if some loans are higher interest.
Total Equity is important because it tells us how much our assets are worth. If you needed to sell your house or car, how much could you get for it. In terms of putting values on these I suggest using sites like Zillow or Kelly Blue Book, which can give you estimates of value. In all likelihood your house should be stable to increasing in value while your car should be stable to decreasing in value.
Debt/Equity is important because it tells us how leveraged we are. We want to see this decrease through time and we always want it to be less than 1. If it is more than 1 then it means we owe more money than the asset is worth. Ideally we keep it less than 0.8 as this would mean that we would be in a good position to refinance should rates drop enough to justify it.
Net Equity is the key line for this section. It tells us how much we would have left over in value if we sold the assets and paid off the debt.
Section 3 contains contingent items. Usually this might be something like a company stock plan where you will get the shares in a few years once they have vested. But it could also include things like provisions for debts people owe to you. For example, if you loaned your brother-in-law $500 to fix his car and you are unsure if he will pay you back, this is a good section to carry that type of contingent money on. For workers that have stock plans I like to track this because it tells you what you may lose if you walk away (if your 401(k) or other plans aren’t yet fully vested you could split part of that into this area as well.
Finally this takes us to a calculation of Total Net Worth, both with and without a contingency. This is calculated by:
Total Net Worth = Total + Total Equity
For the Total Net Worth + Contingency simply add in the total of the contingents. I like to finish this off with a graph like this:
The graph through time serves as both a visual quick-look and a psychological tool as your wealth should start to steadily march higher through time. But remember, don’t sweat the small drops here and there – it is the trend that matters.
Charting it out can also be useful to help identify seasonality in your savings – if you see that you get big gains every year to bonus time or big drops at tax time you might want to think about changing your savings patterns.
A Wealth Check-in is a useful tool, and it allows us to go through our savings in a more systematic way than most of us are really used to doing. It can help us identify if there are issues in our savings and can help us better understand our overall financial health. These analyses should be done continuously and regularly to make sure that we don’t let short term blips mislead us on a long-term journey. Start tracking your wealth and see how you are doing on the road to FIRE!
Here at Caveman Cash we believe that everyone can achieve personal financial independence, and we’re dedicated to helping you along this journey. If you haven’t already done so, please consider signing-up for our newsletter which will bring some great deals to your inbox every week and let you know when we are running our Financial Freedom courses.
Have questions? Drop us a message with questions about your finances and we’ll do our best to get them answered during our Friday Q&A.
The information which is summarized herein does not constitute financial or other professional advice and is general in nature. It does not take into account your specific circumstances and should not be acted on without full understanding of your current situation and future goals and objectives by a fully qualified financial advisor. In doing so you risk making commitment to a product and/or strategy that may not be suitable to your needs.
Whilst we have tried to ensure the accuracy and completeness of the contents of this website, we cannot offer any undertaking or guarantee, either expressly or implicitly, including liability towards third parties, regarding how correct, complete or up to date the contents of this website are. We reserve the right to supplement this website at any time or to change or delete any information contained or views expressed on this website.
This site accepts no liability for any loss or damage howsoever arising out of the use of this website or reliance on the content of the website.