Episode Transcript
Brenton: [00:00:00] A person's net worth may not be an accurate representation of whether someone in this generation is progressing financially.
In this episode, we give you other metrics you can use, or questions you can ask to know whether or not you're on the right track for your finances.
Hello, my name is Brenton Harrison of New Money, new Problems, and your host for the New Money New Problems podcast. In the last episode, we talked about a person's net worth, which is sets minus their liabilities.
And we talked about how for first generation high income earners, it is not always a good tool to know whether you are on the right track with your money.
There are all types of things into that number is reported and all types of things in terms of the makeup of your assets and liabilities that can limit net worth's effectiveness in assessing your progress.
And to do so, we're gonna take a progression from net worth, a person's total assets minus abilities, and we're going to go to their liquid net worth. If you're watching with us on YouTube, and we'll put a link to this [00:01:00] article in the show notes, we're reading from an article on Smart Asset that says, and I quote, 'Liquid net worth is the amount of money you've got in cash or cash equivalent after you've deducted your liabilities from your liquid assets.
It's quite similar to net worth, but the only difference is that it doesn't account for non-liquid assets, such as real estate or retirement accounts'.
In the previous episode, I share that a person's net worth can possibly be inflated by the amount of equity that they have in their home, or their percentage of business ownership that they might have.
Because these assets are things that you may call your own, but it doesn't necessarily mean they're liquid in that you can touch them. Liquid net worth instead says that we are going to subtract your liabilities from only the things that you can touch in a reasonable period of time. Now the definition of liquid assets says that they are excluding things like retirement accounts. And I think that that is a little harsh.
Retirement accounts, especially if you're over 59 and a half are something [00:02:00] that you can technically access, even if in some cases you would have to do so with a penalty and taxes.
So over the years I've tried to have something that I use as my own version of a net worth statement. Now I'm going to coin this as the new money, new problems, net worth.
When I look at a person's progress financially, there are a couple of things that I exclude. One of those things is the equity they have in their primary residence.
Unless someone can tell me that they're going to move in the next few years and they're going to pocket some of those home proceeds, equity in the primary residence can be misleading. And even though the other elements of your finances are in poor condition, you get a false sense of security seeing that net worth rise and rise simply because of home equity.
Equity in a business is something that I consider on the table because even if you love your job like I do, even if you have no intentions to sell, as I do not, you [00:03:00] do not live in your business. And as such, I included not only for the sake of your personal net worth, but also because as an entrepreneur, you should always be trying to increase the value of said business.
On the liabilities end of the spectrum, one thing that I do not include is federal student loan debt that is due to be forgiven.
There are multiple ways to have federal student loans forgiven, either through paying for 20 or 25 years on an income driven repayment plan, or through tools like the public service loan forgiveness program that forgives federal student loan debt for public servants who pay towards their loans for 10 years while meeting a number of other requirements.
We also shared in the prior episode that when you are paying under these income driven plans, it is highly likely that your debt could be increasing as your payments are being made. Meaning that it's not an ideal tool to include in the calculation for something that's trying to show financial progress.
And as such, if you have that federal student debt and [00:04:00] you are aiming to have it forgiven at a point in time, even if it is 20 years from now, I do not include it in my calculations because there will be a time where you could watch a $400,000 debt go to zero overnight.
This calculation is almost like trying to find the average of a series of different numbers and throwing out the highest and the lowest in that set, which is something that people frequently do. So in my example of calculating net worth for the new money, new problems net worth, I take out the equity in your primary home.
I take out any liabilities which you are due to have forgiven. And what's left is your new money, new problems net worth. And after the break, I'm going to give you my six qualitative questions that you can ask yourself to make sure that you are on your way to wealth regardless of what your traditional net worth may say.
We gave you a quantitative measure you can use to assess whether you are headed in the right direction financially. Now it's time for some qualitative questions that I like [00:05:00] to ask of not just myself, but my clients, and friends to know that they are covering all of the gaps that could exist in their finances and that they are doing so in a progressive manner from year to year. The first question is, have you insured the insurables? We've talked about the importance of an emergency fund as you build wealth.
What we haven't talked about is the fact that you are not assured of the opportunity to make it through the wealth building process or the opportunity to make it through In good health. You could unfortunately pass before your time. You could also be disabled and have your income creation and income production ability disrupted as a result of said disability.
Because of these things, it's incredibly important that early on when planning finances you insure the insurables. Before we do anything related to your investments, we need to make sure that you have the right auto insurance, homeowners insurance, individually owned disability insurance, and [00:06:00] individually owned life insurance in place. In some cases, tools like group disability insurance can be appropriate and others you need to supplement those coverages with individually owned policies. With life insurance, in almost all cases, if a person is in good enough health To secure coverage of their own outside of their employer, we encourage them to treat their individually owned life insurance as the policy their family depends on, in case they were to die. And treat their workplace coverages like the icing on the cake. You should not be depending on a group policy that can be altered or rescinded from you more easily than something you own.
Next, do you have a cash cushion in your emergency fund? We don't need to spend a lot of time on this. We spent multiple episodes on this at the start of this podcast. You need to know that in the event of an emergency for things like covering deductibles to things like a disruption in your employment, that you have an emergency fund you [00:07:00] can call on at a moment's notice.
Next, do you have a plan in place for your problematic debts? Now, notice that I did not say, do you have a plan in place to pay off your problematic debts? Because that does not necessarily encompass things like the federal student loan debt that we discussed before the break.
There are some debts that you need a strategy for that does not necessarily entail repayment.
You need to know and be able to articulate a strategy for student loan debt. Just like you must be able to articulate a strategy for debts that do have to be repaid, like a car loan with a high interest rate, like a personal loan that you took out as a result of Skyhigh credit card debt, and like that credit card.
Do you have a plan in place? Even if it doesn't mean paying it off now, but it may mean that at that point in time you know that it will stop being such a hindrance on your journey to wealth.
Next, are your assets positioned to grow over time? I ask the question, are you [00:08:00] positioning your assets for future growth to take into consideration that there are ways to do that without necessarily saving a set percentage. Over time, you may be able to increase the percentage of your pay that you save. You may go from 5% to 10% to 15. As a result of increased motivation or debts that have fallen off that make it easier to save that percentage.
But you can also position assets for growth in ways like taking a job that has a 401K match when your previous employer did not.
Opening up a brokerage account and having a better understanding of the investments to which you're contributing so that they're positioned to grow over time.
Even if you can't save as much as you would like to month to month, maybe you are fortunate enough to own a home that has increased in value. And when you sell that home, rather than putting all of the equity into the next house, you peel off a portion and invest it for yourself, which again would better position your assets for future growth.
And it doesn't necessarily mean that they have to [00:09:00] grow this year. As a matter of fact, in 2022, it was a very rough year in the market. But that doesn't mean that your behavior is not positioning yourself and your assets for future growth, and that is the thing that you can control.
The fifth question is, do you have a plan in place to limit the negative effects that family could have on your journey to wealth?
You'll note how specific I am when I say that many of our lessons are catered to first generation high income earners. That doesn't necessarily mean that you can't listen to it if you're not first generation. I'm not even a first generation high income earner. I'm a second generation high income earner. . But one thing I know to be true of first generation high income earners is that it is highly likely that at some point in time or multiple points in time, family will need help.
And that doesn't mean that family is intentionally derailing your journey to wealth. But there are ways to minimize that damage to your finances. It may be a family member who [00:10:00] overestimates your ability to give, and maybe instead of just giving any amount, you build it into your budget so that when that time comes, it's not a surprise.
You've already put aside money to cover it. If you have an aging parent, you could make sure that they have the right insurances in place so that if they have a health concern, the payment of it doesn't fall on you. That could be something like disability insurance, depending on their age, long-term care insurance that you can cover, which is an upfront expense, but could save you thousands of dollars per month if your parent has a medical need that requires them to have nursing care or go into a facility.
And lastly, have you planned for the eventuality of you no longer being here? One thing I know to be true through experience, is that if you do not have a will, if you do not have advanced medical directives, at some point after your death, when your family should be able to sit and mourn the person that they love, they will instead be dealing with something that you could have dealt [00:11:00] with before you died.
You need to act as if there will be a time when you will no longer be here, because one day that will be true.
These are the questions that I want you to ask yourself and to be clear, you don't have to answer all of them in the positive to be making progress. You may be making progress in one of these six areas, and that is still progress.
But if you're moving forward through this list, you are headed in the right direction. If you're wondering if we have tools to help you in that process, of course we do.
We mentioned one of them a couple episodes ago. Our 30 Money Moves challenge is a 30 day challenge where you will get a video from us every day that will take you through many of these key areas so that after a month's time, you can know that you're better at the end of the month than you were when you started.
But we also have, if you've listened to the commercials for this podcast, our gap finder, which is an assessment we put together to identify potential gaps in your finances. It's not the end all, be all. The goal is for [00:12:00] you to take these potential gaps and enlist the service of a professional to plug those holes. but if you don't know the questions to ask yourself, it's an excellent start that takes 15 to 20 minutes of your time and hopefully will show you some areas where you need to pay some closer attention.
So take advantage of these free resources. We'll put the links in the show notes, and we will continue this journey on our next episode.
