Knowing how to calculate your net worth is important. Not always pleasant because of all of the debt we often carry but measuring it is the first step towards growing it.
Even more important than the value of your assets is their cash flow. How much your investments can earn you is more important than the book value of your net worth.
The real value of investments are always in flux, from our homes to our stocks. I like it that way; I want my investments to go down from time to time so that I can invest more. And I want to be able to cash out of some investments when they’ve performed well.
Fear of Knowing
I’ve learned that many physicians are a touch timid when calculating their net worth. For many of us the number will likely be negative. And seeing all of that debt on paper is discouraging.
So maybe for some it’s overcoming the fear of knowing. I suggest to just do it – get the numbers down on paper and get used to looking at them. Hold back any judgement or resentment and just track the numbers.
In 2012 I still had a negative net worth, I just needed to get used to seeing the negative numbers. I made it a habit to regularly track my debt and my assets until I became financially independent in 2016.
The Value of Real Estate
I know there are many more assets out there than what I know. But as a savvy consumer and a somewhat experienced investor, I don’t need a massive portfolio to enjoy wealth.
Real estate is a popular asset among docs. Your primary residence might be paid off or you might still owe a ton on it. Since real estate isn’t the most liquid of assets, let’s talk about its potential cash flow.
Real Estate Cash Flow
If renting out a house covers its overhead and provides a little pocket change, then it’s cash flow positive. This is what rental income investing is based off of, after all.
You can count your primary residence towards your net worth if it has the ability to earn you income. Or, at the very least, it’s something you can sell fairly easily while being able to live somewhere else for less.
Even if you can rent out spare bedrooms – that’s income.
Net Worth Assessment
When planning for financial independence the balance of my net worth was the most important thing to me. I used it to calculate a safe withdrawal rate in order to live off of it in retirement.
But when I’m trying to actually live the financially independent lifestyle, cash flow is far more important to me. And though these two could be related, it’s not exactly the same thing.
3 years after retiring, the concept of a safe withdrawal rate has taken an even bigger backseat to a steady flow of income.
Cash Flow vs Net Worth
A $200k condo which nets you $3k/month from AirBnb income is much more valuable in terms of income flow than its sale value. It’s hard to put this cash flow into a net worth calculator.
Condos aren’t the most liquid things but after its sale you’ll still pocket a nice chunk of change. For the purposes of a net worth calculation, it doesn’t make a lot of sense to factor in closing costs. Prices fluctuate and it’s hard to predict exactly what you’ll get for the sale. Having a rough idea is more than adequate.
In order to factor for the cash flow, I would recommend creating a separate column in your spreadsheet. It’s good to have the net worth listed but you also want to know what each asset will earn you. This is something I didn’t pay much attention to back in the day.
Cash Flow From Investments
Here in Spain I have started investing in peer-to-peer lending because I haven’t yet found good index fund options. My peer-to-peer lending account should offer me a 7% annual return.
My investments, too, are going to vary. My bond portfolio will be closer to 1.5% and the cash flow from my stock index funds might be around 2.5%. This is important since I might decide to be a little less aggressive as I get older.
Cash Flow from Business Assets
I have learned that most businesses aren’t passive but they still can provide a good cash flow. Because they require ongoing attention, the cash flow is hard to calculate.
Even harder is the value of the business asset. Even if you can come up with a price tag, would someone buy it?
The most obvious business a physician would consider is their own medical practice. But it could also be a consulting practice like the one I have created for myself.
Or it might be creating products for sale. The courses and tutorials I have created have earned me good money over the past few months.
Cash Flow from Work
I really enjoy having nothing to do some days. It’s great to lounge around the house or a cafe and read and exercise and cook a good meal. But this gets old after a while – take it from a very lazy guy like myself.
It’s nice having something to do – some kind of work. It doesn’t have to be medicine but something where you trade your time for income. Ideally it would be something that you enjoy a lot.
Many of us enjoy seeing patients but like to do it on a smaller scale. We like teaching but don’t want a full schedule. All these can help with a steady cash flow.
Even if this work isn’t enough to run your household, along with the other cash flows from above it might be enough to replace your full-time income. This is income diversification and really worth paying attention to when you lose your faith in your economy.