Financial Planning

Assets Minus Liabilities

Assets – Liabilities = Net Worth

For young professionals focusing on goals like college funding or retirement is important, but it can be daunting. Early in your career, it can be difficult to really get the needle moving on the probability of success for your long-term goals; you’re most likely earning the least you will in your career, probably have student loan debt to tackle, and have a housing payment. When you combine all of those factors, your ability to save can be limited.

Before you lose hope because your retirement projection may not be where you would like it, allow me to introduce you to another number that you can focus on…one that you have more control over and can improve year over year, even with those hurdles I mentioned above.

Net Worth.

When it comes to financial planning, I believe in creating momentum, especially early in the process. In my experience, if I can get a client to stick to their financial plan for a year, the likelihood of them sticking with the plan and making wiser financial decision significantly increases. Newton’s first law of motion says an object at rest tends to say at rest, and more importantly, an object in motion tends to stay in motion. Measuring and tracking your net worth is a great way to create that motion within your financial plan.

If you’re not familiar with the concept of net worth, don’t worry, you’re not alone. It’s not hard to calculate your net worth:

  • Take everything you own aka “assets” (Bank accounts, investments, homes, cars, collectibles, etc.)
  • Subtract the debts you have aka “liabilities”. (Student loans, mortgages, car loans, credit cards, etc.)
  • Whatever is left over is your net worth.
    • This number can be negative.

That’s it. A pretty simple, yet powerful formula.

Improving Your Net Worth

There are two fundamental ways to increase your net worth (or climb out of the red).

  1. Increase your assets.
  2. Reduce your liabilities.

Increasing your assets can include saving more money, seeing investments grow (this can have the opposite effect at times), building a business, purchasing a property at a value greater than the debt used to acquire it, and more.

Decreasing your liabilities is pretty simple. Pay. Stuff. Down.

Improving your net worth isn’t as easy as just making assets go up and liabilities go down–it requires time, effort and discipline to set it all into motion. But, by taking the time to determine your net worth and developing a plan to improve it, you can begin to make progress, even if it’s just a little bit.

Managing Your Net Worth

While you are focusing on improving your net worth, you will also be presented with numerous decisions that will have an impact on it. Buying a car. Purchasing a home. Getting that new pair of GaryVee K-Swiss shoes you don’t need (I’m guilty). Trying to keep up with your favorite local Instagram “celebrity” via shopping sprees. Decisions like these will have an impact on your net worth, some more than others. But, ultimately, you are in control of what side of the equation you load up.

Things to consider when managing your net worth:

  • Does a decision/purchase increase the asset, liability or both sides? To what extent?
  • Is there a better way to make a purchase?
  • Could you purchase/have less and still be happy, freeing up more money for building up assets or paying down liabilities?

Being responsible and managing your net worth isn’t easy; if it were, there would be more used cars being driven, fewer McMansions, and more millionaires walking around. Working with a financial advisor (you knew it was coming) can help you work through the numbers and make a better decision for your net worth.  Here are just a couple of examples:

  • After a certain point, increasing the asset side of the equation may not be the best tactic because the interest accruing on the liability side is higher than what your assets are earning. For example, if your online savings account is paying 1.7%, but your credit card debt is growing at 20%, your liabilities are growing faster than your assets…not what you want. When’s the right time to shift to focusing on the liability and slow down the asset growth? Ask a financial advisor.


  • You find yourself coming into a large sum of money and don’t know what to do. For example, you receive an inheritance that would allow you to pay off your mortgage or get a jump start on investing, but you are unsure of what to do. Working with a financial advisor can help you evaluate different factors like the interest rate on your mortgage, the expected return on the investment strategy, your overall liquidity, etc. to come up with the best decision for you.  Note: Don’t feel bad if you don’t know what you would do in this position; this is a scenario the financial planning and investment community continuously debates without coming to an agreed upon conclusion.

In addition to the numbers involved in the decisions, there are behavioral biases working against you, and this is another area where working with a financial advisor and having a plan can be an advantage.

Tracking Your Net Worth

Let’s get back to why I wrote this post; monitoring your net worth is a great way to monitor the progress of your financial plan, especially early in your career. Most financial advisors, myself included, have spent too much time looking at Monte Carlo probabilities of success, stress tests, and other projections and not enough time on our clients’ net worth. This is something I will be changing with the next round of client reviews; net worth is a number I’ve calculated during the planning process (I’m required to), but it’s not something I’ve spent much time discussing with clients.

I’d encourage you to start a simple spreadsheet and begin tracking your net worth on your own. Pick a regular frequency to update the spreadsheet and look at the numbers..are they moving in the direction you’d like them to see? Why or why not? If they’re not, identify and address the problem.

Don’t give up tracking the progress of your longer-term goal, but allow the reduction of liabilities and the building of assets to excite you about your financial plan; see that you are in fact making progress and know that your continued progress will begin to move the needle on your long-term goals. If you only look at investment account balances and Monte Carlo simulations, you’ll miss out on the progress you are making in other areas of your financial plan. And those successes may give you the confidence you need to see your plan through the next year.

So start paying attention to your net worth and make decisions that will improve your number, you’ll be surprised the impact it will have on your long-term goals.

Disclaimer: Nothing on this blog should be considered advice, or recommendations. If you have questions pertaining to your individual situation you should consult your financial advisor. For all of the disclaimers, please see my disclaimer page.