The 6 Numbers I Tracked to Become a Millionaire

Your Next Dollar: Money Management for High Earners

This episode of 'Your Next Dollar' explores the six key financial metrics that high earners can track to achieve millionaire status. Hosted

Key takeaways

Tracking net worth is essential for understanding your financial position; it's not just about assets minus liabilities but also about distinguishing between liquid and non-liquid assets.
Many people are misled by inflated home values—using purchase price or conservative estimates (like Zillow) helps avoid overinflating net worth.

Main topics

Net worth tracking
Home equity vs. liquid assets

Notable quotes

You don't need to track 50 different numbers. You just need to understand where you currently stand.

Conclusion

By focusing on six core financial metrics—especially net worth, liquidity, and

Transcript preview

Speaker 1 (0:00) So most people think they're bad with money. And the truth is, it's usually worse because they have no idea exactly where they stand. And here's the thing. You don't need to track 50 different numbers. You don't need a perfect budget. You just need to understand. where you currently stand. So on today's episode, we're going to be talking about these six numbers that I currently track. And Ryan and I are going to go through each of those numbers. And Ryan's going to react to some of these numbers and tell me, hey, this is overkill and or this is something that you could track going forward. And so, Ryan, I am really excited to dive into this episode because I think this is going to be a really, really fun thing for people to hear. Yeah, Speaker 2 (0:36) super important episode Speaker 1 (0:37) and glad to be here. Speaker 1 (0:44) Awesome. Well, the first one that I track, Ryan, is net worth. Now, the reason why I track net worth is I think this is one of the most important metrics to look at when it comes to your financial scorecard. And for me specifically, I see this as the single most important financial snapshot that I want to look at. Now, there's a couple of different things that can happen with your net worth that can skew some of your data. For me specifically, I'm trying to get my net worth to a point in time where investments are outweighing my home equity. Where I see a lot of people look at net worth is they are looking at their net worth in a way that, hey, I've got a lot of home equity here, and so my net worth is rising over time. But the reality is, when you do that, your net worth is going to be skewed because you can't really pull home equity when you want to go and retire. So for those listening right now who don't know what net worth is, this is your assets. minus your liabilities. And I like to track this with a number of different tools. You can find automatic tools online. But when you look at your net worth, you just figure out what your assets are minus your liabilities. And you set this up in a way where you can list all of these different things out. Ryan, is there any misconceptions you see with people when they track their net worth? Or is there anything that you see that people need to keep in mind when they're thinking about their net worth? Speaker 2 (1:51) Yeah, I mean, I think this is the most important thing you can do when you start. And I will say for our clients, this is the very first thing we do is we put the net worth statement front and center. We get a list of... all of the assets, we then take inventory of any of the debts, and we put it out there to see. Now, one of two things usually happens here. Number one, and this is the in the good category is people say, wow, I actually have more than I thought. I'm actually farther along than I thought. And it is kind of self reinforcing and gets people really excited to go down this journey. The second category we see, I wouldn't put as bad, I would almost put as good. be. And the reason I say that is because it's for people who are not as far along as they want to be, but they're scared to acknowledge. And when we can actually put it on paper and they can see where they are, they can then start addressing what they need to move forward. So it's like a lot of things in life. Like if you're worried about putting this number out there because you're worried about what you're going to see, I can almost guarantee you that the anxiety you feel about not wanting to see it. is worse than actually seeing it. So I will say that when people again are anxious about it, when we put it on paper, they say, okay, we just have to reconcile with where we are now and move forward. But by putting it out there, it becomes real. And it's like a lot of things in life that like the boogeyman's actually not underneath the bed. It's actually scarier not looking under the bed than just looking under the bed and saying, okay, nothing's there. Again, put it out there, even if it's scary. And then you can start to move forward from where you are today. Speaker 1 (3:23) And many people out there who are just getting started, sometimes they can start with a negative net worth. Maybe you went to medical school or you went to graduate school. And so you have a lot of student loans on hand. And maybe you haven't built up any assets yet because you graduated over the course of the last five years. And so you have student loans. Maybe you have some credit card debt. Maybe you have some personal loan debt and a mortgage, whereas you don't have those assets built up yet. Maybe you are looking at something where you don't have a ton of investments. And so you could have a negative net worth. But this is OK because some people do start here, especially when you have. a lot of student loans. And so you want to just work towards building up that net worth over. time. And this is where advisors can help you figure out, hey, what are some of the things that you should be doing or considering when you are thinking about building out this net worth? So I like to look at this as the scorecard. I like to look at this as the scoreboard. When you are playing a game or when you're playing a sport, you want to have the scoreboard on hand and your net worth is that scorecard. And there's another question that I know a lot of people ask, Ryan, is how do you think about some of the assets in place in terms of something like a house, for example? How do you weigh the value of that house? Do you look at like, the Zillow estimate of the home value? Or is it something that you look at maybe potentially the value of when you purchased that home? And that's kind of the value you stick there so it doesn't get overinflated? Speaker 2 (4:37) Yeah, it's a really good question. I would say it depends if someone just recently purchased their house. So in the last year and a half to two years, I usually just take the purchase price, say, hey, let's be conservative. You know, that was the market clearing price when you bought the house. That's probably the best proxy for what the home value is. For someone who comes to us and they've lived in our house for maybe, you know, three, five, in some cases, 10 years, that's where we can kind of look at the Zillow estimate. And it's not perfect, but it's a good kind of ballpark of where the home value is. I like to say, again, the best value of your home is what someone's actually willing to pay for it. And you won't know that until you sell. Speaker 1 (5:15) That's exactly right. And I think that's kind of the way I think about it as well, especially if it's something that's been a certain period of time. Like I've owned personally my home for the last six years, for example, and the value has shifted dramatically over those six years because I bought it in COVID, not because I timed anything, it's just lucky. And it's one of those things where you can kind of see a drastic difference. So I'm cautious when I'm tracking things like my home value just to be safe because we don't want to overinflate it and then you're just sitting in a situation where your net worth is way higher than you actually thought it was. And so in reality, Ryan, how do you think about net worth when it comes to the difference between your investments, the investments that you have on hand and things that you can actually utilize for financial freedom and then assets that you may not be able to pull from like your home? Is there a certain percentage that you want people to look at? Is it like a 75-25 or how do you want them to think about that? It's Speaker 2 (6:03) a Speaker 1 (6:03) really good question. And I will Speaker 2 (6:04) say that I don't necessarily have a percentage that we're trying to target. However, I am a huge advocate of building up wealth. outside of your home value and retirement accounts. So again, fan of home ownership, fan of retirement accounts. However, I think the big mistake that I've seen people make over the years is that they put everything in their house, they put everything in their retirement accounts, and they have no liquidity outside of this. People have been calling this the millennial trap and that there are millionaires on paper right now because of their home value and their 401k. but one big of emergency, they don't have the liquidity to pay for it. So when we're starting with clients, I would say that's kind of one of the big things that we have to focus on is building up that net worth outside of the home Speaker 1 (6:50) and retirement account. And this is why when I look at net worth, I like to track it in a couple of different ways. One is I'll track total net worth, which is kind of the home value if you do own a home, plus some of the investments that you have on hand. But then I track a second number, meaning having, you know, what is your net worth in dollars that you have invested in and cash? Those two things I also like to look at because initially, if you are just getting started or you feel as though, hey, I'm getting my finances together, I've been listening to your next dollar for the last couple of episodes and I'm motivated, I'm ready to go. Well, then what I would consider looking at. is first setting up a couple of different goals. You can set up a goal where, hey, first you want to get your first million dollar net worth, but then you think about maybe I want to get to my first million dollars invested because those are two separate goals that you can think through. And that way you can really have these two different parameters and North Stars that are going to allow you to really start to make some progress with your net worth. Is there, when it comes to tracking, Ryan, is there something where you look with your clients on a frequency when it comes to net worth? Is it quarterly? Is it yearly? Or how do you think about that? Speaker 2 (7:50) I would say no more than quarterly and no less than annually. I would say if you're tracking this every single day, you're going to have a very. difficult time. It's just going to be a roller coaster. It's just not worth it. Once a month is still probably overkill. Again, once a quarter is the most I would check it. But we do have clients that, you know, we just take inventory once a year. We meet more frequently than that, but we just take inventory of the net worth and update it on an annual basis. And it's really powerful in terms of showing progress. I will also say too, it's fun to track your net worth over time. I have a client of mine that I was meeting with right in the kind of the the middle of a correction and they're all bummed because the stock market was down 10 % or so. They had some company stock that was down 20 % and they were just kind of at a really bad mood and felt just kind of defeated. And I was able to go back and be like. hey, do you want to know where you were three years ago? And I pulled up their net worth number from three years ago. And they were like, whoa, this is crazy to see, you know, what the progress has been from, again, three years ago to now, even when you're in the middle of correction. So it's also just kind of a fun thing to kind of reflect on in terms of, you know, how far you've come over the years. And again, doing it on a monthly basis, that's just going to be too much. That's going to be overkill. So again, on an annual basis, or again, the most frequent on a quarterly basis, that's kind of how I would look at it. Speaker 1 (9:09) Exactly, because if you are tracking this on a daily basis, which I've seen people do that, you're going to drive yourself crazy. The market moves up, the market moves down, your net worth is going to be kind of going up and down just like this. And so you want to make sure that you are reviewing this less frequently than you actually feel as though you need to. Here's Speaker 2 (9:23) a quick emotional trick for those who are starting below where they want to be, especially kind of for the doctors out there or for the attorneys. You need to be kind of careful with this, but I did this for myself when I started because I remember when I first started doing this, it was scary to put everything out on paper. But one thing I did is I got an MBA and I took my education very seriously. And I looked at this and said, hey, so I've got some student loan debt, but the asset on the other side of it is my intellectual capital. So I kind of just like almost put an asset, like a holding place of like, this is what my intellectual capital is worth. And like, you can monetize that. I was monetizing my intellectual capital. So again, it's kind of a, you don't want to do it. forever but just as kind of like a quick hack when you're getting started i just kind of put a little placeholder of like this is what my intellectual capital is worth and that helped me kind of get rid of the fear of starting from a place where i was actually negative because my student loans Speaker 1 (10:17) One thing I know a lot of listeners may be asking themselves right now as they're listening to us is, okay, well, what about some of these depreciating assets? How do you think about things like cars that go down in value over time? Or maybe someone owns a boat, or maybe they own an RV, or they own a golf cart. And so how do you think about some of those? Do you put those on your net worth statement? Or do you just kind of leave them off because they're depreciating assets?