I watch Game of Throne’s religiously on Sunday nights, enthralled with the fantastical world of castles and politics and chaos. That theme song from the series could be playing anywhere, at any time, and regardless of the happenings around me, I am instantly transported to the Seven Kingdoms and walking along the battlements of Winterfell with the Starks.
During the third season in particular (currently my girlfriend and I are rewatching all seven seasons right now), Tyrion takes over as Master of Coin for the crown. He quickly recognizes how much debt the crown has on the books. They owe the Lannisters… his own family. They owe the Tyrells. They owe the Iron Bank. And yet they continue to spend opulently on a royal wedding between their current king, King Joffrey, and Margaery Tyrell.
On the outside, King Joffrey, the king of the Seven Kingdoms seems wealthy, but Tyrion crunches the numbers, identifying a negative net worth that could crumble at any moment if the Lannisters, the Tyrells, or the Iron Bank requests the return of their money, along with a little interest. So your net worth, not just the amount of money you have flowing in or your salary, truly represents your present financial situation.
Net worth is the difference between what is owned versus what is owed. So long as what is owned is more than what is owed, then you are in a decent financial position, if not a great one. The larger the gap, the better.
Now and forever more, work to grow your net worth, creating a larger and larger difference between what is owned and what is owed. It will be this growth that helps determine your financial independence, playing a large role in the FI number or FIN (since it should guide you on your path to financial independence) that we created here.
Let us take a look at the life of two individuals, Dany and Cersei, to point out the importance of net worth.
Dany and Cersei both have the same position and make the same salary each year. Dany recently acquired a residence in an older more secluded part of town for little money called Dragonmount, while Cersei has taken over the most expensive house in the neighborhood with lots of debt called King’s Landing. To keep up and protect those residences, Dany acquired her employees for very little cost, working hard to increase them through organic growth. While Cersei spent coin left and right to maintain and acquire her employees (most recently buying another 20 thousand employees from across the sea).
In terms of vehicles to get around town, Dany was gifted three from a friend of the family. She recently let one go and had another that was lost beyond repair, but the other one is in very workable shape and can take care of itself (so long as it does not move into the line of sight of a scorpion bolt). On the other hand, Cersei acquired thousands of vehicles for little cost, but their upkeep is high and continues to grow over time.
Both Dany and Cersei have similar jobs, salaries, and situations, but Dany acquired and maintained her position through the us of smart investments, creating a high net worth, versus Cersei who used debt and poor investments to keep up with the high class lifestyle that she has grown accustomed to over the years. Because they chose to go about spending their money in different ways, and on different things, their net worths, which might have been similar at the start, have grown vastly different over time.
On the outside, Dany and Cersei look to be the same, but the inside is what truly counts… their net worth… not the vehicle that transports you or the clothes you wear or your fancy house. Above all else, you need to know your net worth and track it over time to see how you are doing on your path to financial independence.
In order to figure out your net worth, first add up everything you own:
- House -> fair market value on Zillow or Redfin
- + Car -> fair market value on Kelley Blue Book
- + Investments -> current value
- + Retirement accounts -> current value
- + Savings -> current value
- = Total Owned
Then add up everything you owe:
- Credit card debt
- + Student loans
- + Car loan
- + Mortgage
- + Unpaid bills
- + Any other debt
- = Total Owed
Net Worth = Total Owned - Total Owed
As an example, I will walk you through my current net worth, which I track every month. Some calculate this every day or week through apps like Personal Capital or on an excel sheet, so choose what works best for you and stick to it, but at a minimum track your net worth once a month.
Currently, I do not own a house. I have a beat up, but running 2004 Honda Civic worth $1,000.00 (mainly for its parts). My 401K has $7,300.00 (see my post here on 401Ks). My health savings account has $2,100.00. My Roth IRA has $450.00. My savings account has $1,000.00 and my checking has $1,700.00. This means my total owned is:
Total Owned = $1,000.00 + $7,300.00 + $2,100.00 + $450.00 + $1,000.00 + $1,700.00
Total Owned = $13,550.00
Without ownership of a house, I do not have a mortgage to pay, and neither do I have a car loan. I paid off my student loans on March 1st of this year, and my credit card debt is currently sitting at $30.00. So my total owed is:
Total Owed = $0 + $0 + $0 + $0 + $0 + $30.00
Total Owed = $30.00
If I decided, today is the day I stop everything, selling all of my stuff, quitting my job, and living off of the remainder, then my net worth is the result. So I finished this equation by taking the total owned above of $13,550.00 and subtracting from it the total owed of $30.00.
Net Worth = Total Owned - Total Owed
Net Worth = $13,550.00 - $30.00
Net Worth = $13,520.00
At the age of 36, I am a far cry from where I should be, but last year at this same time, my net worth was:
Net Worth = $7,000.00 - $27,000.00
Net Worth = -$20,000.00
I am much happier this year than I am last year, even if I am not where a 36 year old should be at this point. The difference in my mindset drastically shifted when my net worth hit $0 and took another step when I found freedom from debt just a few months ago. Now if I lose my job or need time to find a new job, then I have 6-8 months of expenses covered… not a lot, but it gives me an immense peace of mind to know I can survive that long.
If you calculated your net worth and you are living in the negative, it is time to start a debt repayment plan… it is time to minimize your expenses by cutting the excess (in Dany’s case it might be time to cut out a Starbucks drink or two)… or even picking up another job to increase your revenue… or doing both. A negative net worth is not worth the stress and the challenges and the fear of not being able to provide the basics for you and your family. Read my story here about how I climbed out of debt over the last year. It will give you a few ideas on what is possible, and more ideas will be covered in upcoming posts.
A positive net worth brings that peace of mind… that comfort. But it will not last long if an emergency pops up, like a freak accident at home or a sudden loss of work. So strive to increase that positive gap between what you own and what you owe. Your goal is to make that gap your financial independence number or FIN, so that by the time you decide to stop working, you can live off of 4% of that gap each year, and enjoy that for the rest of your life.
FIN = Net Worth = Total Owned - Total Owed
Track this number each month to see your progress and always ask yourself… would you rather be a Dany or a Cersei? I might be doubting it a little after season 8, but in terms of finances, there is no question I would rather be a Dany.