Unpacking My Net Worth

Net worth is commonly used as a measure of wealth. It is simple to calculate (assets minus liabilties) and the notion that you want it to grow is readily apparent to most people. The wide range of net worth amongst people with similar incomes also shines a direct light onto the fact that a high income is not wealth.

I have tracked my financial life in an Excel-based budget and planning workbook for >15 years now. There are a lot of interesting lessons in that data. Today I will start to unpack my net worth growth and share some insights from it. Plus, who doesn’t like a little financial voyeurism?

How to Calculate Your Net Worth

The net worth calculation seems pretty simple. Assets minus liabilities. However, what to count as an asset or a liability is not always so clear. What I use in the calculation is tailored to what I am using the net worth calculation for.

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What is an asset?

A financial asset is something that has monetary value. That value could be released by selling it – like jewelry, hockey cards, a recreational vehicle, or personal use real estate. An asset’s value could be in its future income potential. For example, a service-based business. Many assets overlap, like the car that you could sell, but also need to be able to work and earn money.

Another approach is to say that an asset is something that makes you more money than it costs. That concept is valuable when deciding how to spend your money. Buy assets that make money. However, with net worth calculation that approach is not used directly. A passive income stream has value as an asset, but it is tougher to assign a dollar value to.

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What assets do I use for calculating net worth?

When I consider assets for the calculation of net worth, I only consider the big things that I would be willing to sell to unlock the money. For example, I would only count the equity in my house if I were willing to sell it and downsize or rent. I could use the equity for a loan to access the money, but that comes at an extra ongoing interest cost. I also don’t bother with vehicles. Not only do I need or want them, but they also depreciate quickly. Various chattels (eg. jewelry, collectibles, or tools/equipment) are hard to accurately value or sell – so I ignore those too.

That not only simplifies the net worth calculation for me, but it also suits my purpose. My main purpose in tracking net worth is to see that I am building assets that are liquid and accessible. For example, stocks, bonds, ETFs, or other funds. Investment real estate is less liquid, but could still be sold in a reasonable timeframe. I would only count a business if it were marketable to sell, and I was willing to do that.

I also discount the transaction cost required to sell from the value. For stocks or ETFs the transaction costs are like pocket lint, but the brokerage fees to sell real estate or a business are substantial and embedded as part of the investment.

This limited view makes for a short, easy, practical calculation.

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What liabilities do I use for calculating my net worth?

For calculating net worth, liabilities are costs that you would incur to unlock the value of your assets. You must pay off debt attached to a physical asset before selling it. I already embed the transaction costs (like realtor fees) when considering physical asset value, but they are technically a liability. All other outstanding debt counts as a liability. It is logically spent future income, and I must earn that income at some point. There would also be a tax cost to selling most investments. However, that quickly gets more complicated and isn’t necessary for what I consider to be the main utility of tracking net worth. How it changes over time.

Growth of My Net Worth Over Time

Now, that I have bored you with the how to, let’s jump into the click-baity part of the post. Here is how my net worth has changed over the past couple of decades. Like most students, I started out with a negative net worth as I built up my human capital. Through a wise marriage decision and moonlighting, we brought ourselves up to neutral by the time I finished fellowship.

Towards the end of fellowship and for the first 5 years of practice, we had a couple of kids, and paid down the mortgage on our modest house. It was about ten years after graduating medical school that my net worth really took off.

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The Full Monty

I am sure many of you are now going, “What a rip-off. I wanted to see the Full Monty!” That brings me to net worth pitfall number #1. Locker room comparison. The main value of net worth is to see how yours changes over time. What makes it grow and what makes it shrink? How is that tracking for you to achieve your goals? Not mine is bigger than yours.

In fact, external comparison is one of the ways that we undermine our happiness, even as we achieve greater financial success. Knowing your values and goals as the start point, and using your financial power as a tool to further them, keeps money in its proper place. You need to rip out your banjo solo instead of worrying about the orchestra.

Part of my wife permitting me to blog about the granular details of our financial life is that I don’t put specific dollar amounts. So, I am not going to flash the Full Financial Monty on the internet. I will just leave it at “I am above average for a physician“.

However, this approach also better serves the purpose of this blog. The big lessons from my net worth journey apply whether you make $50K/yr or many times that. Whether your net worth is close to zero. Or has many zeroes.

Insights From My Net Worth Journey

The reason why I felt it was important to unpack my net worth with you is because there are a number of lessons embedded in it. The first one is that it was not a straight or parabolic growth line, like you see in a financial software projection. I did not do everything perfectly, but it has turned out well.

We started investing and building good financial habits early, but it took a decade before things really took off. The internet is riddled with success stories, but if you feel like you are spinning your wheels a bit starting out, that is normal! I had the benefit of a high income that smoothed over some bumps. Even if you do not, hopefully learning from my journey will help you to have a smoother ride.

Student Debt

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My wife and I both had student debt. It felt huge and scary at the time. In retrospect, it was just a tiny sliver on the long-term chart. We prevented it from growing during early residency by continuing to live like average people. I was able to quickly eliminate it once I got my independent license. If you train in a profession or start a business, the upfront debt can be scary, but you can hammer it quickly when you start making money. As long as you don’t fully inflate your lifestyle right away. Particularly with purchases that have ongoing costs.

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Investing While In Debt

If you squint at my fellowship years, you will notice that our personal investing (green) had started. Even though we still had student debt (red). We used our RRSPs right off the bat. That helped us to get in the habit of investing. We were able to use the First-Time Home-Buyers plan to access the money and get a big tax refund in my final year when I had a high income from moonlighting.

There are a couple of things that I would do differently now. First, we invested using fee-laden mutual funds until around 2006/7. That advisor/mutual fund model was all we knew at the time, but that was also when I started learning more about investing. Now, I would have learned to DIY invest using a simple ETF strategy. Also, I would have likely started with a TFSA or FHSA for a number of reasons.

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Housing

Housing is where I made the biggest financial mistakes. That is very common because personal real estate is not just a huge financial decision. It is a socially and emotionally charged one. Financially optimal also has to mesh with other aspects of your life. My housing adventures turned out okay due to a combination of luck, earning power, and getting some other things right. It will require multiple posts to unpack the lessons that I learned along the way. However, here are a few highlights.

I bought a house during residency. It felt like the natural thing to do now that I had an income, two dogs, and a kid in the near future. Luckily, I ended up working in the same place as an attending, or I would have lost money moving at a time when I had little. Our home equity grew quickly. Not because of housing prices, but because we hammered our mortgage which was a high risk-free return considering the interest rates of the time.

Around 2011, I moved into my dirty little 10000sqft secret. A number of initiatives to build a profitable practice had finally born fruit and my income sky-rocketed. This was the first time that money did not immediately limit my options and I built the biggest custom house that I could. We poured all of our cash into it because you can’t lose on real estate, right? You will note that our home equity subsequently stayed flat for a decade. The top end of housing markets behave differently.

The bump in 2019 was when we transiently owned two houses as we downsized to our current home. The fact that we were willing to downsize is why I have included home equity in our net worth. However, it is also illustrative of the difference between building net worth and progressing towards financial independence.

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The shift from home equity to cash flow.

Early on, most of our net worth was in our house. As we built more wealth, we did not continually shovel it all into one asset. In fact, we recently released some of the money tied up in housing to further build our income-producing investments. Better cashflow meant that I could work less.

For most people, the need for cash flow becomes more acute as retirement approaches. By considering this earlier, you have more time to make that shift. The other thing that happens as you approach retirement age is that you, or a loved one, have an increasing risk of unexpected health issues that could move your retirement date up. It also takes time to shift your interests, identity, and social networks from the workplace to new ones compatible with your eventual retirement.

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Tax Diversification Amongst Accounts

We also did not “just leave it all in the corporation”. A corporation is an excellent tax-deferred way to invest and you can grow a large net worth by investing the partially-taxed money in there. However, you must pay the rest of the tax to access and spend it. So, it is an over-estimate of your spending power. Further, investing through a corporation can become less tax-efficient as it gets bigger.

In contrast, an RRSP has 100% tax-deferral, a TFSA is 100% tax-free, and both have tax-sheltered growth. They usually outperform a corporation when all of that is accounted for. Plus, a corporation makes an easier target for tax changes than accounts that broad swaths of the voting population use.

Notice that our personal accounts are actually larger than our corporation. That is because my wife has built up a personal taxable account in her name over time. It is an income-splitting strategy. She has a much lower income than me. So, the investments are taxed lightly and can be accessed with minimal taxes owing compared to our corporation or RRSPs. Plus, if we retire before age 65, she can draw from her account while I draw from the corporation. More options for income splitting and tax planning.

The utility of tracking net worth changes over time.

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Early Career

When we first started our financial lives, tracking our net worth helped to motivate us. It is hard to keep your spending in check when you are constantly bombarded by consumerism. Plus, we are wired to spend. Seeing our debt shrink was important psychologically. Both to make us feel more secure and to keep our focus on eliminating it.

Achieving a net worth of zero, building our first 100K, and our first million were all important milestones. The key is that they were internal. Otherwise, we would be continually dissatisfied because there is always someone else with one more zero. Further, as you progress financially, you are more likely to rub shoulders with richer people. For example, through job promotions or invitations to charitable events. Or simply the passage of time, as your friends and acquaintances also make financial progress (or project that they are).

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Mid to Late Career

Mid career, you want to see your net worth growing. Particularly, with assets that are liquid and you can tap for cash flow through income or releasing equity. As retirement approaches, cash flow and access to your money becomes increasingly important. This is another area where net worth falls short. How well your passive income is likely to cover your costs of living is a more practical measure. In other words, how close are you to some flavor of financial independence?

Canadians have some advantages as we move towards retirement, with public healthcare and other social nets. However, having a large net worth that is all tied up in your primary residence is not one of them. You can’t eat your house. Usually.

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Retirement

I have already mentioned that cash flow is more important than net worth in retirement. However, there is one aspect of net worth that I think is important. What do you want it to look like when you die? As you get further into retirement, if your net worth is not shrinking, then you may want to change course. Most retirees leave a lot of money on the table. Spend it while you are alive to make your life better. Or give it away in a planned fashion to make the lives of others better, make you happier, and even save on taxes.

There is much more to unpack.

There was way too much for me to unpack with one post. And we haven’t even touched on my income and spending! Another thing that you may have noticed in my net worth growth chart is that my net worth dropped this year. I am still pretty pleased.