How to Do a Net Worth Audit (And Why It’ll Motivate You)

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2:54So what's up, everybody, and welcome to the Personal Finance Podcast. I'm your host, Andrew, founder of MasterMoney.co. And today on the Personal Finance Podcast, we're going to talk about why you should do a net worth audit and why it'll change your life. If you guys have any questions, make sure you join that MasterMoney newsletter by going to MasterMoney.co slash newsletter. And don't forget to follow us on Spotify, Apple Podcasts, YouTube, or whatever podcast player you love listening to this podcast on. If you want to hop out the show, consider leaving a five-star rating and review on Apple Podcasts, Spotify, or your favorite podcast player.

3:30Now, today, we're going to be diving into how to do a net worth audit. And I'm going to teach you how to increase your net worth dramatically over the course of the next 12 months. See, most people think that they need a budget to turn their finances around, but that's not necessarily true. What they really need is to learn how to do a net worth audit and then develop a system and put this system into place that is going to help you increase your net worth over time. Because here's the crazy thing. You can budget for 20 years and never build wealth because you're focusing on the wrong things. If you're not looking at the scorecard, which is your net worth, this is what's going to make the dramatic changes in your financial life.

4:08And really wealthy people are the folks who are actually monitoring their net worth, not just their income, not just their savings rate, but really what direction is your net worth going in? And why is it so important? Because your net worth is the truth. It's your financial scorecard. It tells you, are you winning the game or are you losing the game? Now, today, I'm going to show you exactly how to run net worth and how to audit it step by step so that you are not confused whatsoever. And then I'm going to show you the exact moves that you need to make over the course of the next year to make sure that this time next year, you have a net worth that is way higher than it currently is.

4:42We'll break down what a net worth audit is, why it is the single best metric for you to be tracking. We'll talk about exactly how to do it step by step so you don't have to worry. I'm gonna give you some of the tools where you can track your net worth automatically. But in addition, if you wanna do it on a spreadsheet, you can absolutely do that as well. I'm gonna talk about the major mistakes people make when they're calculating their net worth. I'm gonna talk about what to do with the results and the high leverage activities that you need to take action on so that you can increase your net worth.

5:08So this is an action-packed episode, so if that's something you're into, let's get into it. So first, let's talk about a net worth audit. What actually is a net worth audit and why should you actually be considering doing this? So your net worth is your assets minus your liabilities and whatever that number comes out to be, that is where you stand and that is what your net worth is. Now a net worth audit is just a structured way for you to look at your net worth in a very strategic manner, meaning we are going to go through our network and actually strategize how are we going to increase this thing?

5:40What a lot of people do is they track their net worth and they say, oh, that's nice. That number got a little bit higher this year. But instead, if you get real strategic about this number, you can build a tremendous amount of wealth just by being intentional. Intention is the name of the game when it comes to the big numbers. Now, you may have heard me talk about this in the past. Some of the biggest numbers that you need to be tracking out there are your savings rates, your net worth, how much income you have coming in, in addition to how much debt you have, and where your net worth stands. And so today, we're going to be diving deeper into this.

6:14We're going to list every asset. We're going to look at your debts. We're going to calculate the difference, and we're going to start to do comparisons quarter after quarter, month after month. Now, for most people, they like to track their net worth once every single year, and that is absolutely fantastic. But if you were in the phase where you are trying to get out of a negative net worth or you're trying to accelerate your path to wealth, then tracking your net worth a little more frequently could be beneficial as well. And one of the cool things that you can do is you can begin to spot trends and make adjustments.

6:43And so because we can spot these trends, we can say, hey, some of this stuff is not working for me and I want to make an adjustment or I want to spot this trend so I can make a move. It is the single biggest indicator of how well you are doing financially. It's not your income. It's not your expenses. It's not your budget. It is your net worth. Because if that number is ticking up and you're seeing your assets grow exponentially, that is going to have a dramatic impact on your long-term wealth building. And here's the big secret. People who track their net worth, they grow wealth faster. Why do they grow wealth faster?

7:12Because they are tracking the right things. They are not worried about the things that don't matter as much. They are instead tracking the right things that truly are going to make a big impact on their wealth. Now, you may be saying to yourself, well, I'm not convinced yet. Why do I need to be tracking my net worth? Why is this so incredibly important? Well, I'm going to tell you exactly why this is so important and why it is the number one metric that you need to be tracking. Number one is it forces clarity. There is no vague considerations or wondering, am I on track or am I making progress with my money?

7:42No, your net worth is going to tell you exactly what is going on. You see the actual math of your true assets minus your liabilities. Let me give an example of how clear this can make it. Let's Say, for example, you have$100 ,000 net worth. You have a full$100 ,000 net worth, and you decide to yourself, hey, I'm gonna go out and buy myself a brand new car. I'm gonna take on an$800 car payment, and I'm gonna go buy a brand new car. And when I do this, I'm gonna see what the impact is. And so you go out and buy a brand new car for$40 ,000. Guess what's gonna happen? If you finance that entire car, if you finance$40 ,000, your net worth will drop 40 % down to$60 ,000.

8:21And this shows the true impact of your decisions. Every single decision that you make is going to have an impact on your net worth, no matter how small or how big that decision is. Number two is your net worth is going to expose problems instantly. A lot of folks out there have issues when it comes to your finances. Maybe your debt is creeping up. And if your debt is creeping up over time, you may be seeing that number or your net worth increase shrink, or it's going backwards, meaning you're falling backwards and going negative, just like in our car example. Secondly, as you can see, Cash thinning out.

8:52If you are spending a lot more cash than you need to be, or you're overspending in a specific category, you could see your cash start to thin out and it could cause problems within your finances. Number three is your investments are not moving. And if you have an investment portfolio put into place and you go back over the course of the last couple of years, and it's not growing as fast as it should be, that is going to give you a big indicator and your net worth is going to have a big indication. Also, one thing I want to note, and I'm going to talk about this a lot in this episode, is one reason why your net worth could be going down is if the market is having a rough time.

9:22Let's say you're in a rough patch in the market and the market takes a dip. Well, that could have a big impact on your net worth. And if that stuff bothers you, then maybe tracking your net worth on a monthly basis or a more frequent basis is not best for you. The psychology behind your net worth is also a very important thing. And so for folks who actually get emotional when they see their net worth go down, it is worth it for you to track it less frequently because the less frequent you track it, the less the market is going to dictate what direction that net worth is going to be. But another thing that you would be able to figure out and expose these problems instantly is if big expenses are draining you.

9:57For a lot of folks out there, maybe you took on a mortgage that was too big for your britches, or maybe you took on some sort of car payment that was way too big. If those expenses are draining you, it can allow you to make educated decisions with your finances that makes you move the needle in different directions. So doing a net worth audit becomes obvious when something is off. Now, number three is what your net worth does. and this is a big thing for me, boy, I love this part of your net worth, is it builds up motivation. I get motivated when I look at my net worth. Sometimes if it gets cut back or goes backwards in any way, shape, or form, I get ticked off and I'm ready to go after it again.

10:32I'm ready to grow that net worth to make sure it is going in the right direction. And you should feel the same way. Maybe you're thinking to yourself right now, man, I have a negative net worth. I am in debt. I have credit card debt or I have student loans, and I don't really have many assets saved up at this point in time, this is something where I'm going to turn this entire situation around. And you know what I'm going to do? I'm going to pay off this debt. I'm going to start investing my money so my money can grow for me. I know that my dollars can work so much harder than I ever could. And this is a great reason to start tracking your net worth because it's going to help motivate you.

11:06When you see it grow, even by 200 bucks, 400 bucks, it is going to start to motivate you. And once you start to see those big net worth chunks change, it is a huge, huge difference maker. Now, this is something we talk about when it comes to saving up your first 100K. We started to talk about saving your first 100K back in 2020 is when we did our first episode on talking about this. And when we started to talk about it, all of a sudden we see other people starting to bring it up as well. Now, one big thing I want you to note is saving your first 100K is one of the most important milestones you can get to.

11:35Why? Because your net worth is going to grow dramatically after that timeframe. So for example, let's say you have$100 ,000 invested. Well, if you get a 10 % rate of return on that$100 ,000 invested, guess what? Next year, you're going to have$110 ,000 within your net worth. But let's say you have a million dollars invested. Well, if you get a 10 % rate of return every single year on that million dollars, guess what? You're going to make$100 ,000 increased to your net worth and your bottom line. That is the big power of making sure you get more money invested is you're going to see a big, big difference.

12:05And when you get to your first million, your first 5 million, your first 10 million, I want to see all of you become multimillionaires. and that's part of the goal of this podcast is we wanna create a million millionaires, but once you get to that first million and you start to see it grow, it is amazing how much faster it can grow because of that. Now, number four, one big thing that worth also does is beyond motivation, it creates accountability. You must be accountable to the number because that number is the real math of what's going on in your financial situation. You could be making tons of money.

12:33You could have a super high income, but if you don't have a high net worth, that money is just getting thrown out the window. You are literally draining all the hard work you are doing if your net worth is not growing. And so this is where we want to make sure that we are keeping ourselves accountable to the real numbers that actually matter. There's a lot of people in this world. There's a lot of people in this country who are making a lot of money. And guess what? Most of them are not actually utilizing those dollars for the right things. And we want to make sure that we are doing that. Also, number five is every wealthy person I know, they do this religiously.

13:05They have their routine and they have their net worth audit routine where they are tracking this stuff. So they are going through this and they don't just track their budgets. They don't just track only their assets and not think about their liabilities and they're trying to get all their wins, but they're not thinking about the losses that they have. Instead, they are tracking their net worth religiously and making sure that they adjust accordingly. The goal is to win at wealth building. And this is the number that you wanna make sure that you have in place that is going to help you do that. Now, in this episode, I am going to give you a step-by-step checklist on exactly how to do a net worth audit.

13:37And I'm gonna show you exactly how to do this net worth audit that every millionaire that I know and every really wealthy person that I know does. We're gonna go through the net worth audit checklist. And I'm gonna also give you a bunch of tools on how to set this up so you can do it automatically. Automating your finances is a big thing here at the Personal Finance Podcast and Master Money. And we wanna make sure that you know exactly how to do this automatically and you know which tools to use when you set this up automatically. So really, really important to note that. And so we're going to get into that right after this break.

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14:40And you'll get access to our private community of wealth builders where you can ask questions, get clarity, and surround yourself with other people who are building wealth. One of my favorite parts about Master Money Academy is we have these things called Master Money Masterminds, where it's people who get together who are working on a common goal and they help support each other and they help learn from each other. So if you've been wanting a simple system, a clear plan, and support from a community that actually cares, join us inside Master Money Academy. Click the link below to get started at Master Money Academy, and I can't wait to meet you inside.

15:13All right. So step one to setting up your net worth audit is to list all of your assets. And so listing all your assets is first starting out with things like cash. So cash could be things in your checking account, money that you have in your high yield savings account, money that you have in CDs, any cash on hand that you have set aside. This is going to be a place where you're going going to list out that cash. In addition, we're going to list out investments. So your 401k, your IRA, your HSA, your taxable brokerage account, your Roth IRA, bonds, index funds, cryptocurrencies, no matter what you have, when it comes to investments, you want to make sure that you list all of those out and you want to add it up.

15:50I don't care if you have$500 at some random brokerage somewhere where you have 200 bucks somewhere that your grandpa gave you a long time ago. You want to make sure that you list all of those different cash items so that you can have an accurate depiction of where your net worth stands. Then we want to think about real estate. So let's talk about real estate for a second, because if you have rental properties, obviously we're going to add those in. And if you have land, you can add that in as well. But one big thing I want to talk about is your personal residence. Now your personal residence is a fantastic asset, and most Americans out there hold a big portion of their net worth in their house.

16:22If a big portion of your net worth is in your house, but a very small portion is in assets, things like rental properties or index funds or all these other things, then we want to make sure that we flip that equation. I am never comfortable when too much of my net worth is all equity in my house. And now a lot of you may have bought homes over the course of the last decade. And if you have, you probably have some great appreciation in there. And it could be a big chunk of your net worth. You might have a nice little net worth, but a lot of it is in your home's value. And so we want to make sure that we flip the script on this and ensure that we have more assets building up over time because those are what are going to help us retire.

16:57Now, your home is absolutely an asset. I'm not going to argue against that, but it is something where you don't want the majority of your net worth to be in your home. And it's something that if you're just starting out, it may happen. It may happen where you had some good appreciation. You maybe had a little bit of luck in the market. And so your home has appreciated a lot. And so you have a big portion of your net worth in your home. But let's focus on trying to get our assets up over time. Now, how do you value your home? Do you look at the Zestimate? You can do that. And that's something where if you use a tool like Monarch Money, for example, they actually allow you to hook up Zillow in Monarch Money to your net worth statement so that you can get an accurate depiction and it's going to move and fluctuate based on whatever the Zillow Zestimate is.

17:38Now, obviously, Zillow is not that accurate. And if you want a real accurate depiction of what your home value should be, there's a couple of things that you can do. You can slowly move it up based on the price that you paid. So if there's been a lot of appreciation, being conservative over time is really important. Number two is you can look at the assessed value. So the tax appraiser or the property appraisers are going to be much slower to move up the home value than would be a Zestimate, for example. So they are going to be slower to move up the exact value of your home because they are typically trying to be as conservative as possible.

18:08And so you can use that value. If you don't know how to find that number, you can just go to your property appraisers website. And if it's county, it could be city. It depends on where you live, but find your property appraisers website. Mine specifically where I am in Florida is in county. and then you can go look up your home's assessed value and see where they have that number. That's a very conservative number that can help you not overinflate based on the home. Because if you overinflate your home and then the market pulls back, which homes don't go up forever, newsflash. And so if the market does pull back, that's going to allow you to ensure that you're just not overinflating your net worth.

18:40And then you have to have a negative year because the market pulled your home back so far. So that's how I would think about your home. Now, if you want to be extra, extremely conservative, you could just utilize the number that you bought the home for. That'd be another place that is really conservative, but you can absolutely do that. Again, Monarch Money uses Zillow and his estimate and they link that up that way. You can do that if you want to. Nothing wrong with that whatsoever. Just note that if the market does pull back the housing market, then you would just have to adjust your net worth accordingly.

19:10So that's another thing that I want you to think about as we go through this. So it is very important to also think through some of your other assets. So you can think of things like cars, if you have precious metal, if you own gold or silver, if you own collectibles, maybe you own some expensive sports cards or Pokemon cards. I just read an article, by the way, that Pokemon cards are outpacing the S &P 500. It's a crazy metric, but there are some valuable things out there like sports cards, like Pokemon cards. I've seen Michael Jordan cards going for over 100 grand as of late. I've seen Tom Brady rookie cards going for over 100 grand as of late.

19:42So a lot of crazy things that are there. There can also be cash value if you have life insurance, don't like cash value life insurance whatsoever. So if that is something that you do have, I do not recommend it, but that is something that you could have within your net worth numbers. And I want you to use conservative numbers when you do this. I don't want you to try to overinflate your net worth. No, we want to make sure that we are conservative with this because if there is some adjustments, we want to make sure that it does not impact our net worth too much and cause us to fall back. Now, one thing I want to say is that if you use some of these automated tools that we'll talk about, Modark Money is a great one.

20:15Another one that we'll link up down below is Personal Capital. That is a free net worth tool that you can use that helps you track your net worth over time. That's a great one I've been using for over a decade. Personal Capital is one that is also fantastic. So you can use either one of those tools. Monarch Money is just included in your budgeting subscription. If you use code PFP, you get 50 % off of Monarch Money over the course of the next year for 12 months. So it's a really, really good deal. And a lot of people use that link. A lot of people in Master Money Academy, for example, have used that link for Monarch Money.

20:46and when they do that, they're just shocked at how cheap Monarch money is when you get the 50 % off code. So use code PFP. At the time of recording this, that is good for 50 % off your membership at Monarch money if you want to utilize a automated tool. Now, the automated tools are great for a number of reasons, one of which is you don't have to keep going back into a spreadsheet over and over again, but you can use a spreadsheet too if you want to. Nothing wrong with that whatsoever. Some people like updating their net worth manually and I don't blame you because I think it is something that you could stay more on top of it if you do update it manually.

21:17But I like personal capital, Monarch money, and or you can utilize a spreadsheet. Now let's talk about liabilities. So next, we are going to list our liabilities. And the most common liability for most people is their mortgage balance. That's going to be the big, big difference between how much liabilities that you have on hand. So your home is going to have a specific value, and you're going to subtract the liability, which is your mortgage balance from that home. So let's say, for example, you bought a home for$400 ,000 in 2020, and it has gone up being worth$800 ,000 over the course of the last five years.