Net worth is one of the most important financial numbers to track because it gives a clear picture of your overall financial progress. It is calculated by subtracting everything you owe from everything you own, with most people focusing primarily on investments; bank accounts; home equity; and debts like mortgages, student loans, and credit cards. Many physicians begin their careers with a negative net worth due to large student loan balances, but the key is not where you start. What matters most is the direction your finances are moving and how consistently you are building wealth over time.
There are gray areas when calculating net worth, especially with accounts like 529s, custodial accounts, Roth IRAs for children, and Donor Advised Funds. Some people include these accounts while others do not because they consider the money already designated for their children or charitable giving. The important thing is consistency from year to year so you can accurately track trends. The discussion also highlights the difference between net worth and investable assets, noting that investable assets are often the more useful number for financial planning because they represent the money available to support retirement spending and long-term goals.
Investable assets generally include retirement accounts, brokerage accounts, and rental properties, while excluding things like Social Security, pensions, annuities already converted into income streams, and personal property. Rather than assigning a dollar value to guaranteed income sources, it makes more sense to subtract those future payments from the amount your portfolio needs to provide. Tracking net worth and investable assets annually can help measure financial progress and guide important decisions. Paying down debt and investing are both valuable because each one increases overall wealth and improves long-term financial stability.
This is the White Coat Investor Podcast, Financial Boot Camp, your fast track to financial success. Let’s talk about net worth for a minute. Net worth is perhaps the most important number, certainly one of the few important numbers in personal finance and investing. A lot of people get fixated on their credit score. Your net worth is dramatically more important than your credit score as far as financial numbers go. Don’t worship at the altar of FICO. If you’re going to concentrate on stuff, concentrate on things like how much you have in investable assets, your savings rate, and your net worth rather than your credit score.
Net worth is everything you own minus everything you owe. Technically, it includes everything: your clothes, your computer, your vacuum, everything. But practically speaking, what most people include on the asset side is their investments, bank accounts, and their home, and that’s usually about it. Your investments and your home are kind of the big chunks. If you can calculate that much each year, that’s probably enough. You don’t have to go crazy assigning values to your cars, RVs, boats, clothing, jewelry, or anything like that. If you want to, you can. It technically is part of your net worth, but a lot of people leave that out of any sort of annual net worth calculation they do.
On the other side of the ledger are your liabilities, your debts, credit card debt, auto loans, and your mortgage. So your net worth includes your home equity, but you’ve got the value of the home on one side and the value of the mortgage on the other side of the ledger. You subtract the liabilities from the assets, and that’s your net worth.
If you’re like most doctors, your net worth starts out negative. Seventy-five percent of doctors pay for medical school with loans, so when they come out of residency or fellowship and they’re 31 or 35 or whatever, their net worth is negative because they’ve got two or three or $400,000 in student loans and $10,000 in assets. So they have a negative net worth, and that’s okay. The point is not where you start. It’s the direction you’re moving in and the speed you’re moving at.
Now, I get lots of questions about net worth. People want to get into specifics of what should be included and what shouldn’t be included. For example, they ask about accounts like 529s and UTMAs and their children’s custodial Roth IRAs and donor-advised funds. The truth is, you can include those if you want, but I think the important thing is to be consistent because what you’re really looking for here is the trend that you’re moving in.
Technically, in one respect, the 529 belongs to you even though your kid is the beneficiary. You could pull all the money out, pay any taxes and penalties on doing so, and buy a sailboat with it or put it in your taxable account. It’s technically your money. It’s interesting, though, because for estate tax purposes, it’s already been considered a completed gift to your kids. So there’s a little bit of interesting nuance there with 529s.
A lot of people look at these sorts of things for their children’s accounts and don’t count them in their net worth because they consider them not theirs anymore. It’s their kids’ money. So 529s, UTMAs, custodial accounts, and custodial Roth IRAs, for instance, often don’t count in their net worth because they view it as their kids’ money, and I think that’s very reasonable.
When it comes to a donor-advised fund, or DAF, that’s particularly true. You can’t take that money out, just like you can’t take out your kids’ Roth IRA or your kids’ UTMA account and put it into your own account. It’s gone. It’s definitely a gift you’ve already given away. But if you want to include that in your net worth, I think that’s okay too. Just be consistent year to year.
A more important number than net worth is probably your investable assets. This is a number you can actually use for something important and make decisions with. Net worth is more kind of interesting and neat to know and useful for making sure you’re moving in the right direction. But investable assets is a number you actually use to do financial planning.
For example, as a general rule, you can take out about 4% of your investable assets per year and expect your money to last in retirement for at least 30 years with a very high probability. But that’s not your net worth. That’s your investable assets that you multiply by that number.
Generally, investable assets just include your investments. Most people don’t include their home in that. They typically don’t include their debts in that. They typically don’t include things like 529s, UTMAs, donor-advised funds, or anything that isn’t just your investments. If you have rental properties, you’d include those. If you have retirement accounts, you’d include those. If you have taxable brokerage accounts, you’d include those all in your investable assets.
What I wouldn’t necessarily try to do, though, is somehow put a dollar value on income streams you have. If you have bought a single premium immediate annuity, which is basically a pension you buy from an insurance company, I would not include the value of what you paid for that any longer in your investable assets. Same thing with Social Security. Don’t try to assign a dollar value to it and put it in your investable assets or your net worth. Same thing with a pension. If your pension has already been annuitized and is now an income stream, I wouldn’t include it in your investable assets.
When you go to calculate how much you need out of your portfolio, you subtract all those sources of guaranteed income from the amount of income you need. So if you say, “I need $150,000 to live on,” and you’re getting $20,000 from a pension, and you bought an income annuity that’ll pay you $20,000 a year, and you’re getting $40,000 from Social Security, now you only need your portfolio to provide you $70,000 a year, not $150,000 a year. But I wouldn’t try to assign a value to any of those assets and put them into your investable assets. I would leave them out and just subtract the guaranteed income from the amount you need.
So net worth is worth calculating once a year. You or your financial advisor certainly need to know what your investable assets are so you can do financial calculations and financial planning with that number. But these are numbers worth calculating once a year, whether you’re a do-it-yourselfer or not, just to track how you’re doing and where you’re going.
The question we get a lot is whether we should pay down debt or invest, and the truth is both of those are good things to do. Both of them increase your net worth, and they generally increase your investable assets as you go along as well. So don’t worry so much about where your money’s going in that respect. Worry more about how much of it is going toward these good things that build your net worth. Hope that’s helpful to you.
The White Coat Investor Podcast is for your entertainment and information only and should not be considered financial, legal, tax, or investment advice. Investing involves risk, including the possible loss of principal. You should consult the appropriate professional for specific advice relating to your situation.
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