Article #1 in the Hi Output Wealth Series.

Introduction

There is little disputing the ubiquity of net worth in popular culture, it seems that every day there is a new headline describing the latest change in the global ranking of "richest person". Forbes even has a real time list that they maintain. 

But aside from being click bait for many Americans, (and likely the world) there are a number of practical reasons for measuring and understanding your net worth. In this article we will aim to accomplish the following: 

1. Answer what is net worth and how to measure it
2. Understand why measuring your net worth is useful
3. Walk through an example using our downloadable template
4. Analyze our results and figure out how this exercise can kick start your financial future
5. Why does measuring and growing my net worth matter?

1. What is net worth and how do I measure it?

In the world of personal finance, there is nothing complicated about measuring wealth.  It is simply the sum of your assets (ie. things of value) minus your liabilities (ie. debt). The sum value of the things you own minus the value of the amount you owe. The following table provides a list of some common assets and liabilities for this calculation. 

Common Assets	Common Liabilities
Stocks or Bonds Cryptocurrencies Vehicles or Other Transportation Commercial or High End Equipment Cash Real Estate or Other Owned Property "High End" Art Work "High End" Jewelry etc.	Credit Card Debt Student Loans Medical Bills Total Mortgage Total Car Loan Debt etc.

There are a few important points to make about assets and liabilities when measuring net worth

• Be realistic about the value of your assets. Remember that asset valuations (at the time of sale) are always subject to the liquidity (number of buyers and sellers at certain price point) of the market you are engaging in. In short your asset is only as valuable as what someone is willing to pay and it may take a long time for the market to meet your price or not happen at all.
• Assets should not be valued at the price that you bought them at, but by their current market value. This is relevant for all assets but particularly relevant for assets known to depreciate over time like vehicles and other equipment. You shouldn't expect your new car to retain its purchase price indefinitely, as wear and tear reduces the shelf life of your vehicle.
• This convention can be broken with high end collector's items or during very specific market conditions (for example, when new cars become scarce due to supply chain issues during COVID).
• High end assets generally hold their price better than low end assets. Other collectable items like jewelry and art work also don't retain their value particularly well unless they are of high quality (pure metals in the case of jewelry) or are collector's items (think limited productions etc.) 
• Always remember that asset appreciation is also going to be taxed for capital gains in accordance with federal tax law. These can be anywhere from 0-20% of only the asset appreciation and not the total value of the asset. We will cover this more extensively in a future article.
• Measure the big ticket items, don't worry about small or rapidly depreciating assets. When it comes to calculating your net worth don't get overly fixated on capturing the value of everything you own. It's highly unrealistic that you will ever really sell of everything you own.

2. Why is measuring your net worth useful? 

Spending time measuring your net worth is probably low on your list of activities, but it is also quite a useful exercise for a few reasons. 

1. Helps you understand where your largest assets and liabilities are - For many individuals who have their finances spread across a variety of assets and liabilities it may not be particularly clear where your largest assets and liabilities even are. Not knowing this can lead you to spend more than you have to in loan repayments, expose you to unforeseen asset risk, or drag down the growth rate of your net worth. 
2. It begins to uncover how external financial institutions view your financial state -  Whether it is a car or a house there is a high likelihood that at some point in your life you will need to apply for a loan. While not the only contributor, having a high or non-negative net worth can be an important determinant in receiving a loan and can also change the types of assets that you can afford.
3. It informs you of your financial state at a particular point in time - taking stock of your net worth can be a wake up call for individuals at any life stage that may just be turning a blond eye to their financial situation. It also allows us to come back to measure regularly (in 6 months or a year) and see how we have progressed. 

3. Case Study: How do I measure my net worth? 

In my own personal experience I have found that best tool for tracking and measuring my net worth has been Google Sheets, Google's free spreadsheet tool. It allows the highest level of flexibility, reliability, and is free. In order to facilitate this example, for advanced users and beginners, I created this spreadsheet to help capture each of our assets and liabilities, as well as, easily calculate our total net worth. As you can see in the spreadsheet, we have the following categories:

Classification	Asset/Liability Type
Assets (A)	Total Ownership Stake in Home (Real Estate)
	Stocks (or other financial assets)
	Total Cash
	Other Assets (Jewelry, Art etc.)
Liabilties (L)	Total Student Loans
	Total Mortgage
	Total Car Debt
	Current Credit Card Debt
	Current Unpaid Health Bills
	Other Liabilities

To simplify the net worth measurement, we consolidated asset and liability classes...

From an asset perspective, we created line items for common asset classes and reserved more niche asset classes for the other categories. Ownership stake in this context is the percentage of the loan repaid times the current market value of the real estate. Generally speaking home owners, mortgage terms require home owners to put down 20% of the loan value upfront and then with monthly payments this amount climbs from there. A rough approximation is fine for this exercise, more detailed posts will cover this topic in the future. 

From a liability perspective, we have captured some common debt types and for this exercise all that is required is collecting how much is owed to these different debt categories. While very important generally, do not worry about interest rates at this stage, as we are only taking a snapshot of your current financial situation.

For your personal calculation all of these figures can easily be found via the websites of the various companies you have worked with to purchase the assets or take out loans or if the purchase occurred in the past. In the case of an asset that likely has a value that is different than it's purchase price, a simple google search or quick appraisal can be used to fill out the spreadsheet.

Below we have filled out our spreadsheet with some ball park estimates of values for each line item and calculated the totals, landing at a net worth of -$459,000.

Classification	Asset/Liability Type	Total Current Value
Assets (A)	Total Ownership Stake in Home	$50,000
	Stocks (or other financial assets)	$30,000
	Total Cash	$5,000
	Other Assets (Jewelry, Art etc.)	$0
Liabilties (L)	Total Student Loans	$60,000
	Total Remaining Mortgage	$450,000
	Total Car Debt	$30,000
	Current Credit Card Debt	$4,000
	Current Unpaid Health Bills	$0
	Other Liabilities	$0
Totals	Total Assets (sum A)	$85,000
	Total Liabilities (sum L)	$544,000
Net Worth	Net Worth (A-L)	-$459,000

4. What can I learn from this net worth calculation example? 

Now that have done the work, let's evaluate the results of our measurement and determine our next steps. If these were my own finances I would conclude the following: 

1. This consumer has a number of sources of significant debt - While having multiple sources of debt isn't inherently a large concern, debt can be a useful tool in certain situations, the consumer might consider paying down this debt depending on the interest rates associated with these loans. An important next step here will be to track down the interest rates for each of these loans, with this information you will be able to determine which to pay down first or whether you should pay them down at all. 

2. This consumer isn't over indexed on holding cash - while an important safety net, holding too much cash can expose you to the risk of inflation which can erode the value of the cash you have on hand. Again this is a topic for a future article, but in general you should not expect cash reserves to retain their value. Yes, the dollar amount will stay the same if you don't withdraw or add any funds but the purchasing power of those dollars will most certainly decrease over time. The rate at which this spending power decreases is directly related to the inflation rate, for now just operate with the assumption that during a period of high inflation holding cash is particularly costly.

3. This consumer has taken on significant debt that will have to be actively managed - $459,000 of debt is in general terms a sizable amount of debt. In order to shrink this debt and increase net worth over time, the consumer is going to have to strategically pay down their debt while making sound investments. While not inherently bad (a lot of the debt is coming from a housing purchase which is generally deemed good), a lack of a plan to manage this financial situation could result in additional debt accumulation. In future posts, we will walk through these strategies to accelerate positive financial outcomes. 

With this first list of observations come critical follow up questions that will begin to shape your financial future: 

1. Is the amount of debt I have taken on too large?
2. What is the best way to pay down debt and where do I start?
3. How should I consider investing to growth my assets to outweigh my debts?

5. Why does measuring my net worth even matter? 

In practice, net worth has real life implications and learning to manage this number can significantly alter the quality of your life in a variety of ways.  A few are listed here:

1. More investment opportunity - having a net worth of more than $1 million dollars in the U.S. can provide you access to investments that are not available to the average american by labeling you as an accredited investor. (This designation can also be achieved by having over $200,000 in income for two consecutive years or ($300K filing jointly)). In practical terms, the average investor can only invest in publicly traded stocks or crypto assets. An accredited investor can invest in private companies (think Uber or Facebook) before they are listed on a public stock exchange and has access to hedge funds and other private investment firms (the details for which we will cover in subsequent blogs). This is relevant because early stage investments while riskier are generally where the largest returns are. For example, early Uber investors made 5,000x their money when Uber went public (source). So if they invested $1,000 they came out with $5 Million, never mind that early stage investment likely required higher levels of initial capital Mike Walsh an early investor put in $10,000, which in theory could have or did turn into $50 million. Before we get too excited, the vast majority of startups fail and Uber happens to be one of the greatest early stage investments of all time, but still the point stands. 
2. Access to higher quality financial resources - In some cases positive and in some cases negative, there is an industry that caters to the management of High Net Worth Individuals. Unlike the rest of Americans, who either have to manage their own finances using robo investors or their own financial accounts, high net worth individuals can actually get companies to manage their finances for them or get access to financial products or tools that wouldn’t otherwise be offered.
3. Near Term Flexibility and Safety Net - By far the most important element of establishing net worth is the flexibility and safety net it provides. One of the fundamental things that most people likely don’t consider in their day to day life is that working individuals are by and large paid for their services. And if you don’t provide service or value you don’t get paid. This commits the majority of Americans to consistent work weeks for virtually their whole life. Establishing a large net worth , however, gives you the opportunity to take vacations or take time off from work or pursue new opportunities in your own time. More critically, however, it also enables you to handle unexpected expenses or events in your life. As Americans know all too well, a car accident or layoffs can offset weeks or months of hard work which can set off a difficult cycle of growing financial liability. A meaningful net worth allows you to weather these storms much easier. 
4. Long Term Financial Freedom - The last bucket, which many hold in high aspiration is financial freedom and for the purpose of this blog the point is to be able to finance your lifestyle without having to work. A high enough net worth gives you the ability to work for fun or not at all. While most high net worth individuals do continue to work, you can actually accomplish this in two ways: 
1. Sell a portion of your assets with the expectation that they or other assets will appreciate by the same amount in the following year (over simplified but this is the basic concept). So you can do the same next year and forever into the future.
2. Purchase assets that generate cash for you to spend without having to sell the asset. Again we will get into the details in a future post, but this can also be accomplished in perpetuity so long as the asset that you are purchasing maintains the rate at which they pay out cash and the overall value of the stock remains relatively stable.

Growing your net worth has a compounding effect, that can give you optionality, opportunity, and protections that others simply don't have. Learning to manage and grow your net worth is an important pillar of a successful life and we aim to teach you how.  

Conclusion

Over the course of this introductory article you have learned:

• How to measure net worth
• Why measuring your net worth is useful
• How to use our downloadable template
• About some follow up questions to make your new understanding actionable
• Why measuring your net worth matters

Additionally, we also introduced you to an easy to use Net Worth Calculator. Collectively, we hope we have instilled a sense of the importance of growing your net worth and kickstarted your financial journey to higher levels of net worth. We have much more to come.

Thanks for reading! Please feel free to reach out with feedback or requests on any of our social media accounts or at the contact us link: Youtube, Instagram, Twitter & TikTok (@hioutput_data, @hioutput_gaming).