Episode 7 – Net worth: what is it and how do you increase it?

Episode transcript:

[musical intro]

Seth

All right. Welcome back to Fund Your Future with DRS. Jenny, I’ve gotten a lot of feedback from listeners. Well, mostly my friends and family about that we need to plug our email address more often so people know to follow and contact us. So it’s: drs.podcasts@drs.wa.gov. Okay, got it out of the way. We’ll never have to do it again. [laughs]

But yeah, I’m glad we’re back. I’m super excited to talk to you about net worth and what that means and how to calculate it. And what do you think of when you think of the term “net worth?”

Jenny

I mean, I guess because I study finance a lot: how much how much a person is worth. Everything that’s in my bank account. Plus, if I own a house that’s included, if I own a car, that’s included everything, that if I died tomorrow would have to go to be… not necessarily sold off, but given to other people.

Seth

Yeah, I love that way of thinking. I never thought… My wife and I filled out wills a number of years ago and it was kind of the same thing, like going through the list of things that we have that who would we give them to? Thinking like, “Oh, well, some people could sell these” or what has value in our lives that somebody would actually care about, I guess, you know, versus like the refrigerator, which maybe has a little bit of value. But like in the grand scheme of things, it’s just going to get sold off an estate sale or whatever.

When you described that initially, I was thinking one of the things that I always feel weird about we’re talking about net worth and I use the word “value” and you use the word “worth” like sometimes feels like it has some judgment to it or like you’re ranking people.

Jenny

Ooo, yeah.

Seth

I was actually a little bit afraid to talk about this in that it can sometimes feel like I’m behind or I’m not keeping up. I think one of the things that we want to talk about is like, that’s okay. There are different stages of life and being able to understand if you’re not on track, that’s okay and how can you get on track and maybe you’re on track, but that’s just what it’s like to be a 22-year-old who just graduated with some student loan debt.

Jenny

Yeah. Yeah. So you’re saying like if someone is in their twenties and thirties and they do all the calculations and they see that their net worth is actually a negative number, then it’s not the best, but it’s also not the worst. You’re kind of right about on par with probably everybody else.

Seth

Yeah. I think that can be super intimidating for folks. This extra pressure associated with like, Oh my gosh, even if I sold everything I owned, I would still owe something. And I think that’s actually a really big milestone for a lot of people when they, like, clear the decks. And I’ve heard it referred to like “getting back to zero” or “getting back to broke.”

That is something worth celebrating and tracking and knowing where you’re at. And I think the other thing that when I think about net worth, sometimes it’s hard. And once again, I’m going to go back to like comparing people, which I don’t necessarily want to do as a positive thing or a negative thing. But as a society, I feel like we think about salary as like whether or not somebody is rich or not and really net worth and total assets, which we’ll talk a little bit about maybe a better indicator, like I can buy a $80,000 car but be making tons of payments on it like, oh, a lot of money.

That vehicle hasn’t actually added to my net worth. I might actually be behind versus if I went and bought a new car, a new to me car with $5,000 of cash. Yeah. Like that then is what that is worth to me because I could turn around and sell it. Whereas if I took out a loan to buy something, then I have that debt on top of it as well.

I have this really expensive car, but I also have the loan that’s associated with it.

Jenny

Yeah, that’s an interesting way of looking at it. Like you said, as a society, we tend to value people on what they make per year as their job. But if maybe we actually looked into someone’s spending and fact that spending versus saving conversation, they may be spending every single dime they have on whatever on the Internet and more and be in tons of debt.

Yeah. And so it’s interesting to think about that net worth, but it’s also can be intimidating and scary. I thought about this once where it’s what if it’s like a bad Black Mirror episode…It’s like, what if everyone was walking around and you had this little number floating over your head of what your net worth was? It would be terrifying.

And I think it would just be obviously making people very self-conscious. So, you know, I think we’re not trying to say it’s the end all, be all of if your net worth isn’t where you’re at, then you shouldn’t feel bad about yourself. I think it just goes back to our ultimate goal of goal setting.

Seth

But I love your example because I think it would also be super surprising. Yeah, you would see numbers on people that you wouldn’t necessarily expect. True. And you might be more likely to have conversations about how did you do that? Like, it’s funny, associated with my job here at DRS, I have the ability to see what people have in some of their savings accounts.

And when people retire…

Jenny

Let’s be clear, it’s the DCP accounts.

Seth

The DCP or the Plan 3 account and kind of what their investments have been and I contacted somebody because I saw that they had worked for school district as I was assuming, like a custodian or janitor based on what plan they were in and what I could see their salary had been, but they had saved like, I can’t remember what it was, but it’s something like 500,000.

It was a significant amount of money. And I, I just called them just because I was curious. I said, What did you do that we could tell other people about? And his point was really just he was married. And he said we just try to live off my spouse’s salary.

Jenny

Oh, okay.

Seth

Just saved by it. So, I think it’s another thing to think about when we talk about net worth is sometimes there are pieces that you can’t see as well, like somebody might have been able to get out of college without debt. And so, they had this different kind of maybe Head Start or started in a different lane than somebody else.

And so, I think that’s sometimes difficult to compare person to person that way.

Jenny

Definitely. And obviously rent is a big one too. So, if you’re able to live with your parents or live with a sibling and you’re not having to pay rent, obviously then you could put a lot, probably a lot more money of your income towards something like a DCP savings.

Seth

Yeah, I always go back to like most people, their three biggest expenses are housing, food and transportation. And if you’re able to knock one of those out, like your example, that I think is a perfect example of living with a parent, or I’m maybe more unique in society in that I walk to work most time, so I really cut my transportation expenses.

If you can cut one of those big three expenses in a in a significant way, you can really kind of supercharge your savings in a way that most people might not have the opportunity or might not think about doing. And I think I know we’ve talked previously about savings and spending, and I think that’s the other thing that people are in different circumstances and your life circumstances can change.

I don’t know what your experience was like when you got married, but like you go from having some fixed expenses that then just got cut in half because now you’re sharing them possibly over two incomes. And the reverse can happen too. If people get divorced, they’re used to having certain expenses and now they’ve got to figure something else out and that those can be pretty significant shocks to what you’re saving and spending, which then can have an impact on your net worth.

Jenny

Yeah, or I was even going to say too where when I got married… Then it’s also, yes, we can consolidate some expenses, but then also there was all of the extra added expenses too where it’s… I’m trying to think of a good example, but extra spending with food or something that your spouse may over purchase or your…that you know, that starts of the arguments of, well, why did you buy that?

Seth

There are different expectations because you’ve got your kind of normal standardized budget that you’ve been used to for some time and then that changes and it may change one way or the other and each person might feel differently about it. It goes back to your example of like living with your parents or living with a sibling or living with a roommate.

Those different circumstances or experiences can have really, really big impacts on what your overall savings is going to be and what you have available to save. Yeah, which will then once again have a big impact on your net worth.

Jenny

So, Seth, what do you use to track your net worth?

Seth

I’m pretty old school. I’m not using like a pad of paper and a pencil or, like, put in a file, but I use Google Docs, so just basic, kind of like an Excel spreadsheet. And once every six months, I log in to all my accounts that have value in them. So my checking and savings account, my DCP account, my Roth IRA account, those different accounts.

And I also do the same thing with my wife’s accounts. We just put them all listed in our spreadsheet. I’ve got a row for each one and then put the number on either July 1st or January 1st. Those are the days I pick because they’re easy for me to remember and put all those in there. And then what else do I put in there?

Okay, so I put in my home value. Okay, so we own our home and put in what the projected worth is. And I’ve one of the things I think is tracking your net worth, it’s sort of like how much detail do you really want to go into? And it’s helpful to be consistent. But like when I look at my house values sometimes, I had previously been like using Zillow or Redfin and then starting to use the county assessor value, you know, assessed value.

I’m not sure which is the right or wrong. And I think at some point it doesn’t really matter. It’s just like you pick one and you stick with it, right? Yeah. So I just put all of those sorts of things in the spreadsheet and then usually like every six months or every year, I’ll remember something else that I should add or I’ll, you know, have sold something and then take that off the list.

Yeah. So, what about you? What do you use?

Jenny

I guess I’m a little bit more new school. I use mostly Mint.com and I know that I’ve mentioned that in a previous episode. I use that for mostly for budgeting, but it is nice because they do have you can put in different assets your car, your car loan and your home. So, I have it pulling the data from… Zillow is what they use.

They’ll pull in the latest data from Zillow to estimate your home value. From a budgeting standpoint, I usually go in and check my transactions once a week or so. I haven’t been as finicky about the net worth. I don’t think I’ve put in the value of my car and I don’t think I’ve put in my home loan. But I kind of know those things in the back of my head.

I’m more just interested about tracking what I have in a savings account, things like that. So I’m not, too concerned. I try not to get too obsessed with it.

Seth

Yeah, no, I think that’s really reasonable. I think one of the things that I oftentimes worry about worry might be too strong of a word, but when we interact with people as DRS sometimes, folks who are checking their account balance, their investment balance every day or every week, and seeing things go up and down and feeling really nervous and anxious about it.

And I get when people are getting close to retirement, that’s like money you’re going to live on. So that can be a source of anxiety. And I think one of the things I wanted to have as a takeaway for this episode is hopefully this isn’t a piece of anxiety, but like when you’re tracking your net worth and thinking about that, your it could be intimidating if you’ve got a lot of debt or if you’ve got a lot of student loans and all of these things kind of added up.

But it’s a way to also see like, hey, I’m making progress, I’m adding to my retirement accounts, I’m adding to DCP, I’m paying off my debts in loans. So those amounts, though, they still exist, they’re getting smaller. It can be a powerful tool. And if you track it regularly, whether that’s annually or quarterly or monthly or whatever it is for folks, it can help you see progress.

Jenny

Yeah, I think that’s a great point. And you were talking about celebrating those small wins and especially with paying off student loans. I’ve had friends post stuff on Instagram and Facebook when they’re like, today’s the day I finally made my last payment on my student loans. And it’s such a good feeling and it should be celebrated. So that sort of really huge step that you can make in your financial future to celebrate and being able to track your net worth and being able to see like, okay – Phewh!- I’ve paid off that credit card, like where can I go next?

Seth

Yeah, what’s the next step? And I think that’s one of the exciting things about tracking net worth is that you can then see like, okay, that’s been that debt has been zeroed out and I was spending $200 or whatever a month and now I’m going to move and reallocate that to my DCP or I’m going to reallocate it to paying off a different debt and continue to we talked previously about like debt snowballs and paying things off over time, but that then translates and moves from the kind of the negative column to the positive column when you’re talking about net worth.

So, you’re looking at your debts and you’re reducing those and then you’re moving to your assets and adding to your assets.

Jenny

Yeah. The other one I was going to mention too that I, I used to use a little bit, but it’s called PersonalCapital.com and that one’s a little bit more stock and savings bond [focused].

Seth

Yeah it can be like really investment focused.

Jenny

Investment focused. Yeah.

Seth

I used that for a while and found it. I had a lot of challenges getting it to link to my other accounts and yeah, and that’s why I sort of settled on what is, feels like a much lower technology solution, but it’s less of a headache. I know there are a lot of different tools like that out there that help consolidate everything into one place so you can just look once you get it all set up, think that can sometimes be the challenge.

And some people’s financial lives are more complicated and it might be more beneficial to get something like that set up once and then not have to deal with it again. And there are also some things that don’t necessarily always fit like really easily into that. Like if you took a loan out from a family member or something and it’s been able to track that can be a little bit more challenging… than those automated tools systems.

Jenny

Yeah.

Seth

When you think about your assets, the things that count as a positive towards your net worth, are there things that you… not that they’re necessarily unique to you, but that might be kind of outside the normal thought process?

Jenny

Yeah, that’s funny. Actually, we were just talking about this this morning with a couple coworkers …I’m a Lego fanatic and not as much as one of my other coworkers. But we were talking about how acquiring Lego sets and how they can appreciate over time in cost. And that made me think this morning I was like, okay, well, mostly I keep these just because I like them, but you know, maybe ­— not that I would ever sell them off — but maybe my grandchildren would sell them off.

Or when I die, whoever my spouse would sell them off. And that is one of those things that they’re not necessarily going to lose value over time, unlike a car would. Yeah, and I know we were talking about that, about assets. A lot of people consider their car as obviously an asset. But as we said, that cars do lose their value.

Seth

Yeah. Over time. Yeah. There’s a difference between appreciating assets — assets that increase in value over time and assets that depreciate over time. And I think that is something that sometimes can be confusing when you think about it. And then there are assets like, you know, investing in stocks and bonds and mutual funds and things like that that tend to appreciate over time.

But there’s like really all assets you’re some of your Lego sets might go way up in value and some might just stay kind of steady. Sure. Like different types of asset.

Jenny

I know I think I even have some Beanie Babies in a closet somewhere. So, you know, I have not done the research on those. And let me just say for the record, I have not I’m not tracking the value of my Lego, my four Lego sets that I have. But it’s just one of those things like, okay, yeah, maybe this would be — it’s not why I’m keeping it, but maybe it would be worth value someday.

Seth

Yeah. And that’s, you know, I think that’s also a good thing to consider. Kind of like when you’re at different stages in your life, things like might make up a bigger percentage of your net worth. I know when I was younger, I used to ride road bikes, road bicycles, and some of those can be like, I mean, thousands of dollars easily to start off with.

And then you’re talking about like high end bikes of five or $6,000. And if you’re just getting started in life and you have an asset like that, you would probably count it towards your net worth. Whereas a person who’s in their sixties or seventies who’s riding a bicycle like that might not even think twice about it in terms of like their overall net worth.

And I think that probably is true with vehicles as well. Like for a person who’s really reliant on their vehicle or it’s a big part of their overall asset base that they might count it, whereas somebody who’s older might not consider it. But yeah, and actually cars are an interesting example because some vehicles might go up in value when you think of like classic vehicles, but those you might not necessarily be buying as an investment.

And I think that’s something to consider is like, are you buying this for enjoyment? I like you’re example…

Jenny

Mostly for the enjoyment…

Seth

Yeah. Once again, I love your example of Legos. I think that’s a perfect example of something that may have value or and may have more value to you than somebody else. But at some point in the future it could also be an asset. I feel like I’ve heard stories of people selling all their handbags and getting like $20,000.

Talking to a former coworker about somebody selling like all of their comic book collection and using that to like, kind of jumpstart their retirement savings or college savings. I can’t remember exactly…

Jenny

Yeah, we’re going to talk about that a little bit.

Seth

I think that’s one way to think about like your net worth. Is it transferable? Are there assets that you might be able to use in different ways? And I think for a lot of people who’ve had collectibles, that something that makes a lot of sense for them. But I think for for other folks who are just like trying to figure out how to get started thinking about things like yard sales and like they know I’m guilty of this, where I’ve had some things in closets for my bicycles are actually probably great examples of things that I, you know, haven’t written in a decade that I might be able to sell and use that value from that asset and add that to my net worth in a different way.

Jenny

Yeah. So, here’s a good topic. Have you ever had a professional appraiser come to evaluate your things like your bicycle?

Seth

Yeah. No. The only thing I think the only thing in my life that I’ve ever had appraised has been our house when we went through like, the homebuying process, which is it’s funny you mention that, because as I track our overall net worth every six months, I’ve thought about like we’ve made some improvements. We remodeled our kitchen and remodel our bathroom is like, would it make sense to have the house reappraised?

I mean, we’re not in a position to sell anytime soon, so it hasn’t really crossed my mind. But yeah, that’s a good question. I’ve thought about that. Like in terms of collectibles, my parents have like coin collections and things like that. And once again, you’re mentioning of like what would happen if I die? What pluses and minuses in the columns is somebody going to be responsible for these debts or do I have assets to pay those debts off?

Interesting way to think about it. If you really wanted to kind of look at these assets, life insurance policy or whatever sort of things that might pay out.

Jenny

Yeah, I kind of want to get back to the house appraisal thing too for our listeners. And if there’s something that that you are considering to have your house appraised, one thing to take into consideration is that once you do get your house appraised, then yes, your home value does go up. But then of course, that means you usually have to pay more taxes on your home as well.

So I think this is why a lot of people will tend to wait until they’re ready to sell their house to have it appraised.

Seth

Yeah, that makes sense.

Jenny

Yeah. Home value is a great one too just, my husband loves gardening and I love decorating. And so we tend to spend a lot of time and money investing into our home just to, one, make it the kind of place where we want to live. But we’re like, Hey, great, this is going to be a great asset to our home in the future.

Seth

That’s a great example. We put solar panels on our house a few years ago and it was kind of the same thought, like, Yeah, we’re spending this money now, but it adds to the overall value of the house later on. And what your example was is perfect. Well, that sometimes those things pencil out from a financial point of view and sometimes it might just be kind of a wash, but you get satisfaction out of it.

And I think that that’s important. I know that was exactly how I felt when we remodeled our bathroom. I was like, I don’t know if this will really improve the value of our house long term, but I just really wanted a different bathroom. I feel much better with that now going forward. And that’s that’s perfectly fine.

Do you have any other thoughts about things that you would qualify as an asset or as a liability, like things that subtract from your net worth that you would think of?

Jenny

The only things that come to mind are just the general loans and debts. You mentioned earlier: If you if you have promised a family member some money.

Seth

Yeah. Yeah. What what’s hanging over your head. But yeah, I think it’s for most people it’s pretty straightforward. I mean credit card debt.

Jenny

Credit card debt.

Seth

Not something that we had talked about on this episode, but something we’ve definitely talked about in the past, kind of just general debts overall and like what you’re obligated to pay going forward, whether that’s student loans or a mortgage. I think sometimes these things can get a little bit complicated with cars and homes, things that are also an asset that you could sell and use to pay off the debt.

Jenny

Sure, Yeah. Like a car is a great example. If you have a $20,000 car, but you still have a $10,000 loan on it, if you died, someone would have to take care of your car. They could sell the car, pay off that $10,000 loan, and then be able to have the extra money.

Seth

Yeah, I think that’s one of the things that’s probably worth thinking about is like if you’re underwater on your on your loans and underwater on your home, like trying to make sure that those things balance out when you’re doing this math of like what your assets are and what your liabilities are like. If you calculate your net worth and you have a $300,000 house, you can’t just count the $300,000 house.

You also have to count the $200,000 that’s still left on your mortgage.

Jenny

On your mortgage, exactly. Yeah. And I think this kind of gets back to the whole conversation also of owning a home versus renting, especially for people who live in the city. And a lot of times it can be more advantageous to rent long term versus own. Again, that little number hovering over your head or whatever, but you don’t have that huge mortgage that’s counting against your net worth.

You’re just paying, of course, towards the rent balance.

Seth

Yeah. And then if you have those the additional funds available that you then turn at invest, then you’re growing your net worth, not necessarily in the value of your home, but in the value of your retirement account or your deferred compensation account or your Roth IRA or whatever investment vehicle you’re using. Well, was there anything else that we need to talk about Jenny?

Jenny? Okay. I feel like we need to plug our email address again one more time. Yeah. So I don’t get in trouble from any listeners and we would certainly love to hear if there are things that we missed on what people might count as an asset or what people might count as a liability, or if there are other things that you’d like us to talk about or discuss on the podcast, you can email us at drs.podcasts@drsretirestage.wpengine.com

Seth

All right. Thanks for listening.

Jenny

Thank you.

[music outro]

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