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Why Focusing On Your Net Worth Is Often A Mistake
Is your net worth important? Is it a valuable target to have in terms of the specific net worth you want to have someday? That’s what we’ll talk about today.
Net worth is one of the key numbers in your financial life, and there’s a lot of confusion about what net worth actually is, what it isn’t, and in many cases, there’s an overemphasis on its importance.
What is Net Worth?
Guys claim to know what “net worth” means, but many don’t. In a nutshell, net worth is your assets minus your debts—the number you get as a result of that equation, and hopefully it’s a positive number. People know that, but they don’t understand what debts and assets really are or whether they apply to net worth.
Debt vs. Bills
Here’s an easy example: Let’s say you have kids, and you get divorced. And let’s say you’re paying alimony and child support.
When you calculate your net worth—all your assets and liabilities—do you put child support down as a debt in there? The answer is no. Child support is not a debt; it’s a bill, like your monthly utilities. A debt is something you can pay off whenever you want (assuming you have the money).
So can you write a check and pay off your electric bill for the rest of your life? No—which means it’s not a debt. It’s a bill, and it’s completely irrelevant to your net worth. Same with your child support. It’s part of your balance sheet and part of your budget; it’s just not part of your debt.
Now, is alimony a debt? Yes! Unlike child support, alimony is something you can actually pre-pay. It’s a set amount you’re liable for and you pay it off over X-number of years, but you can pre-pay it just like any other loan or debt you have. I did that myself. But your bills have nothing to do with calculating your net worth.
Guys fuck this part up too: When they calculate their net worth, they go through their houses and start adding up the value of things like their furniture. Sorry, that’s not what this is. The fact that you can sell your couch on Craigslist for $200 shouldn’t be factored into your net worth.
Assets are real assets—real estate, money in the bank, stocks, bonds, precious metals, and even businesses you own can sometimes be counted as assets. You can look up the blue book value of your car and count that toward your net worth as long as you put your car loan down as a liability. The problem with doing that is that things like cars depreciate rapidly, so you have to recalculate your net worth every year. Likewise, if you have investments like Bitcoin that go up, you can recalculate based on that and see an increase in your assets.
Another piece of advice I agree with is that you shouldn’t even count the value of the home in which you live toward your net worth. The argument is that the house is not an asset because it’s an expense item. It sucks money away from you every month; it doesn’t make you money. Rental real estate is definitely an asset because it brings in money, so you could certainly place that in the asset column as long as you place your mortgage in the liability column.
But I would strongly advise you guys who own your homes not to count that toward your net worth. I’ve never calculated the value of my home as part of my net worth, even when it was paid off. That’s an optional thing, but I strongly recommend it.
Is a Business an Asset?
The answer is maybe. In Alpha 2.0, I talk about two business models: Model A and Model B.
A Model A business is one that relies on you 100%. If you’re a consultant, an architect, or an online personality, that is a Model A business. If you stop working, the business doesn’t keep bringing in money. The income stops. Model A businesses are great sources of income, but they’re not really assets in terms of your net worth.
A Model B business is one that you own, but theoretically, you could step away from it, sell it, or retire, and that business would keep making money. But if you are the business, that doesn’t apply to you.
This doesn’t mean you should never have Model A businesses; I’ve talked about this in the past in my online courses. There are plenty of advantages to having a Model A business, not the least of which is the income potential. There are pros and cons to both. The point is, you cannot consider 100% of your Model A business an asset.
Maybe you can include a percentage of it; in my case, for my Alpha Male 2.0 business, I’m the face of the company. The way I’ve structured it, though, is like this: If I completely retired tomorrow, I could go to an island in the middle of the South Pacific, never check my e-mail again, and rely on whatever residual income I have from my companies and investments. Would this company immediately stop making money? No. Over time, the amount of money would drop. E-books and courses would still be sold. Because my presence wouldn’t be there to create new articles, videos, and other content, the income would go down. That means that my Model A company has some value as an asset, just not 100%, since I’m the face of the company.
This gets very complicated, and I don’t want to get into the weeds in terms of evaluating a business. Don’t assume that simply owning a business is something you can count as an asset and include in your net worth. Most times, it really isn’t.
Is Setting a Net Worth a Valid Goal?
If you’re saying to yourself, “I want to have a net worth of one million dollars,” is that something worth pursuing? In my opinion, no. Every time I hear a guy say he wants to be worth X-millions of dollars and I ask him how he came up with that number, it turns out he just pulled it out of his ass. It doesn’t have any real meaning to him. He didn’t analyze how much money he needs to make to achieve the goal or how much interest he needs to spin off to create a certain type of lifestyle.
If you’re worth $3 million, how do you know how much money that creates for you in residual income so you can retire? Have you sat down and done the calculations? Have you factored in capital gains taxes? Have you shown how much you’ll make in residual income from $3 million?
Whatever the number is, how do you know, five or 10 years from now, that that money will create the interest you’re planning on? That’s the problem with setting a net worth goal: You don’t know any of these factors.
And by the way, I have a net worth goal. I’ve mentioned before that I’m very happy with my income, but based on where I am in my life right now, I should be worth a lot more money. That’s all subjective, though; a lot of you would probably think my present-day net worth was great. But I don’t have a net worth goal just because I came up with a number.
Instead of a net worth goal, what I recommend to you is a residual income goal—specifically, a monthly after-tax income goal. So instead of saying you want to be worth $5 million, you’d say you want to make $10,000 a month after taxes from your completely passive investments. That’s a much better goal, because now you’ve targeted how much money you need to have in what types of investments that have a specific ROI.
So my real goal is a monthly after-tax residual income goal. In other words, how much money could I make if all my businesses vanished tomorrow morning and I completely retired and never worked another minute? How much would my investments pay me every month after taxes? (You have to factor taxes in there, especially capital gains taxes.)
You know how much money you need to make per month to be happy, and that’s a lot clearer to you than some future number you want to be worth someday. That’s too abstract and doesn’t really serve you well. Once you have that after-tax calculation, you can figure out the necessary interest or cap rate (or whatever you need based on your investments), and you can calculate a much more accurate net worth figure that’s much better than one you pulled out of your ass because it sounded good.
Do you see the difference? That’s why I don’t recommend having a net worth goal. I recommend having a monthly after-tax residual income goal.