Speaker 1 00:00:08 What's up, everyone. Welcome to the finance for physicians podcast. I'm your host, Daniel Raimi. Join me as we dig into what it looks like for physicians to begin using their finances as a tool to live better lives. You can learn more about our
[email protected] let's. Jump into today's episode. Hey guys, hope you're having a great day. I am going to be talking about the third part of the vitals check series, but just a quick recap, before we jump into it. So the first part we talked about clarifying your values. The second part was saving, spending, giving ratios. And today we're going to be talking about that third part, which is net worth. So we're going to be talking about what is your net worth, what actually we're tracking with your net worth, how you might track it. We're going to talk about what you can use it for and why it's so beneficial.
Speaker 1 00:01:01 We'll also go through some benchmarks to be thinking about and how to track it and, and really what you, you can use it for and actually apply it to your situation. So I think, I think this is going to be beneficial for, for any, any of you guys, especially those of you that are not, uh, tracking your net worth. And so we'll jump into that now. Okay. So what is net worth? So just to clarify, net worth is really just a snapshot in time of your assets or what you own minus your debt or what you owe. And so the difference of those two numbers is your net worth. So when I say tracking your net worth, I mean, taking a snapshot values, the snapshot of values for all your assets, listing them out and then snapshot value of all your debts or what you owe in, listing them out, and then having a net at the bottom, which is the difference between those, you know, total assets minus total liabilities.
Speaker 1 00:02:04 And that's that's net worth. You could take your net worth. So as I'm recording this it's middle of December, so there's a December 15th. You could, if you were to document your net worth on December 15th, you would go log into all of your accounts, your assets, uh, like your checking account savings account, you know, write down the balance. As of this point in time, uh, you would log into your retirement accounts, write down the balance. As of this point in time, you know, other assets like your house, you would estimate the value. Um, at this point in time, or you could use something like Zillow to estimate it your car, you could estimate the value, um, or you can go on services like Kelly blue book, if you want to get a more accurate estimate of value. Uh, and so basically you're going through each line item, asset, and same thing for debts.
Speaker 1 00:02:54 You're logging in. If you have access to like an online account for like your mortgage balance scene, with balances or student loan balance, looking up the balance, writing it down. So essentially you're just writing down all those balances as of that exact point in time, December 15th, as the example I'm using and then adding them up. So assets total minus debt or liabilities total, and that's where we get net worth. So obviously, you know, there's a few ways this can be changed. I mean, like savings obviously increases net worth. Um, but so just to clarify, the ways to increase your net worth adding to your assets, I think that's the obvious one. Now that can be either through, you know, saving literally like, you know, putting new money into your savings account or making contributions to retirement plans. Also it can be just from growth of the underlying asset.
Speaker 1 00:03:53 So like your investment account goes up in value or real estate prices. Like your house increases in value just because of the market has increased. So either way that's adding to your assets, you can also increase your net worth by subtracting from debt. So that happens just from normal monthly payments, part of your monthly payment, as long as you're paying some principal, part of your most monthly payments for debt is going to be reducing the amount you owe. Or if you decide to write a big check to pay off a chunk, that's subtracting from your debt. So either one adding assets or subtracting your debt is going to increase your net worth on the flip side, same thing, or, you know, opposite in the spectrum. How do you decrease it? So subtracting from your assets, whether you're spending down or the market values are going down, say the stock market like tanks, like that's going to decrease the value of your retirement assets, or if you're incurring debt, you know, adding to debt, you know, that's going to obviously decrease your net worth.
Speaker 1 00:04:56 It increases your debt, but decreases your net worth what's. So what's nice about the net worth. Is it kinda like nets out to the, uh, net effect of, of, of any given, uh, actions. So maybe you're, uh, selling a house and buying a house. So in a lot of cases, your net worth doesn't change much over the course of that time, especially if you're, you know, keeping your money in the house, because you're basically just taking, uh, from one house you're liquidating and then putting it into another house as long as the net. So when I say net, I mean the value of the house minus the amount you owe, as long as that's the same before and after your net worth really doesn't change much. So you really have to, um, add to that asset in the form of market growth, or, you know, putting more into it or pay off debt for you to move the needle on this.
Speaker 1 00:05:51 So that's net worth. So what does this translate to like, if we're starting to look at like life circumstances, um, most of you guys listening are in are physicians. And so I know earlier in the career, just as a nature of how it works, typically your, your net worth is going to be lower primarily because of student loans and delayed, uh, earning and so higher debts and lower assets. It's obviously going to translate to lower net worth many people in medicine have considerably or substantially negative net worth that's okay. That's just kind of part of the career track. So you have say you're in training and all you really have is the student loan that you use to get through med school. And, you know, maybe it's three or $400,000 and that's really the only asset or debt you have. And so your neck, if you're balanced on your student, loans is 400,000 and you have no assets.
Speaker 1 00:06:46 Your net worth is negative 400,000. And so that's, that's where a lot of times physicians are starting is in the negative net worth range. And that's not necessarily bad. It's just kind of where you're at. And it's a lot of times a result of going through the career field. And so the challenging part about being in that situation is you're not getting any interest on your assets. You're actually, the reverse is happening. You're paying interest or getting charged interest on the debt. Um, and so that's kind of like slowing you down. Interest slows you down on debt. And then if you have assets that pay interest, it, it speeds you up. Um, so it's tough to grow your net worth when you, when it's low, there's not really any compounding happening. That's just the way this works. Now, as you start to further get further down your career and dig out and build up wealth.
Speaker 1 00:07:45 So you're paying off student loans, um, maybe you paid them all off and you're building up assets. Maybe you have retirement accounts and investment accounts and real estate that allows your net worth increase. And the more assets you get it's starts to pay interest to you or, you know, growth. And so that speeds you up and, uh, you're not paying as much interest to others. And so that's, you know, compound interest starts to take over. Um, I think it was Einstein said compound interest is the eighth wonder of the world. Um, it it's like exponential growth. You know, when you start to get dollars of interest paid on your dollars, when you're earning interest on your interest, that all starts to compound and it can really start to grow. But I think the key is so what I, what I was talking about before early career physicians, negative net worth, typically later career, you start to have substantial net worth, hopefully, you know, several millions of dollars depending on your situation.
Speaker 1 00:08:42 Um, but the key is how do you get from negative to multimillionaire? It's all about how it's changing over time. This is why net worth is one of the most important vitals you can monitor is because it gives you a peek into how you're tracking in this progression, how your net worth is especially how your net worth is changing. Over time is huge. That's, you know, like I said, a key vital or KPI or performance indicator, whatever you want to call it, how your net worth is changing over time is huge. It's going to give you a huge, huge indication of how you're doing. And so that's, that's important to know the other big key is by tracking your net worth or, you know, seeing what your net worth is. It's gonna, it's going to allow you to identify inefficiencies. You're gonna see things you would otherwise miss.
Speaker 1 00:09:39 It's gonna allow you to, you know, see how you're doing liquidity wise. Like it'll bring attention to issues, like say your cash accounts are getting too low or your debt balances are not going anywhere. It's also going to help you to think about maximizing tax shelters, because you'll see it all on one page. It's like, if you have your re you'll see your retirement accounts over, especially over periods of time are going to grow faster than taxable accounts, investment accounts. And then you'll see how they compare to savings accounts and you'll see how much more they grow and that's can help people to really start to understand the benefit of putting your money to work. And then you'll see your you're going to be more likely to identify inefficient debts or assets. Like just, you know, if you see that interest student loan interest rate is high and it reminds you every time you update your net worth, oh man, that student loans is just, I gotta get rid of that thing.
Speaker 1 00:10:41 So some of the things to watch out for especially early career, really, I guess, for anyone in any stage is keeping an eye on that debt ratio or debt to income ratio is probably a good ratio to think about, but like how high is your debt, um, relative to what your earning potential is going to be. Now, that's especially true for when you start to talk about like your mortgage student loans are a little different because of all these income-based repayment plans, you can kind of set the payment as a percentage of your income, but for most debt, you know, it's not going to be based on your income. And it's just going to be based on the repayment schedule. So you gotta be careful with how much debt you're taking on early on. I'll give you an example. Most lenders will loan you up to like 45% of your income in debt payments.
Speaker 1 00:11:32 So what that translates to is say your income is a hundred thousand. They'll loan you up to the amount that will cost $45,000 a year. So your debt payments can be up to $45,000 a year. If you're making a hundred thousand, that's 45% debt to income ratio. Um, so you have to that's how much lenders will loan you. That's typically way too much to take out. Um, that's gonna, that's called house poor. Basically. They'll loan you up to the point where your house poor they'll loan you basically up to the point where you can just afford whatever debt you're taking out and barely put food on the table. And so you have to keep an eye on the debt overall debt balance. And ideally, you're not getting the max alone. You ideally, you're thinking about it from the standpoint of what's my total picture look like.
Speaker 1 00:12:25 And the other big thing is with your net worth, it should really depend on your plan because everybody, I mean, I'm not an advocate of like, everybody should be millionaires. Like some people should not be millionaires. Some people should give all their money away. Some people should become multi-millionaires. But the key is what is, what are your values or goals? And that goes back to that first vitals check, like understanding what's most important to you is huge. And starting to measure against that. That's a big deal, and it really should depend on your plan for moving towards that. If you can put that into the equation, that's where you start to really move the needle. That's where you start to really know, you know, that's how you should be measuring. This is like, how are you tracking? Uh, the tendency is to say, how do I compare to my peers?
Speaker 1 00:13:15 Which is okay to understand, but like, what does that even mean? Like who, who are your peers? Are you, do you want to be exactly like all your peers? Or maybe you're thinking of it? Like, how do I, how can I be better than my peers? I don't, that's not the best metric it's okay. But it's not the best. The best is how do you compare to your ideal version of yourself? So that's what we want to be measuring against is your values where you want to go. So I'll give you some examples. Maybe you maybe for you, it's most important. One of the values you have is like balance and family. And so if you have like a $10 million net worth and you're working 60 hours a week, so you see your net worth $10 million, that's in, you're working a ton, like that's not in alignment with your values and you should make some changes.
Speaker 1 00:14:01 So this, you know, seeing your net worth, continuing to grow, and it's going to be growing fast. If your net worth is 10 million might be, that should be a sign that you should be scaling back at work. If, if balance and family is your, is a big value. On the other hand, if you, if financial independence is a huge thing for you, and, you know, though that you need like a $20 million network to like achieve that, then maybe you don't need to downshift in that same exact situation. Maybe you should be working 60 hours a week because that's like the number one thing on your list is to be financially independent, as soon as possible and 60 hours a week, you are able to give 60 hours a week and 10 million. You're not quite there yet. So like for that situation, you got to keep growing it.
Speaker 1 00:14:44 And maybe you're not quite there yet. Okay. So if, if you're resonating with this, um, I think it's important. Talk through like how you might start to track it. Uh, it's gotta be simple. We don't want it to be like super complicated. You don't want to get, go over the top of this. I'll I'll link to a spreadsheet template that you can use to start, uh, tracking it where all the different categories are already lined out and we've already built, built in some of the formulas and that sort of thing. Um, so hopefully that can cut some time off of this. We track it for clients. Monthly is a good way to track it. We typically track it every time we're meeting with people, but you know, maybe you're going to do it quarterly. But the key is though that you're doing it at some frequency, maybe it's annual, that's probably the least frequent.
Speaker 1 00:15:34 I would track it. You're doing it over some regular frequency and you have a template. Typically a spreadsheet works well, but it's okay to, you know, write it down. If you like to do it that way, you have a go-to place that you're documenting all these values and you're doing it over some regular period of time. And you're getting in that habit of doing it regularly. So let's say you liked the idea. So I do it for my own finances as well. I track it monthly. I'm just in the habit of doing it that way. Um, so I ha I used to have a calendar reminder on my calendar. That was for the first of every month, that was just a reminder to do, to update the values. So I would, uh, get the reminder and then I would log into my, uh, log into all my accounts and then just write down the values for everything and then move on.
Speaker 1 00:16:24 Now I've gotten into the habit of it, to where it's just, I don't even have to have the calendar reminder, but if you're new to this, maybe you're setting an appointment reminder for yourself to, uh, go in there and do it every so often. Or maybe you're working with a financial planner. And so maybe you ask them if you, if you can, if they can share an updated value or the most recent, uh, net worth statement so that you can see it, or if they're not tracking it, I would ask them, you know, if they could help you start to track it, but it's a lot of this is like habit formation. And it's, it's definitely a good habit to have, but if you're not, if you're not convinced totally yet. Um, I thought maybe to wrap this up, we would talk through some of the benefits, um, just to kind of make sure those are clear.
Speaker 1 00:17:10 So I mentioned before, I think it's one of the best KPIs or, or vitals to track, to, to monitor overall progress, especially when you start to track it over time. It's one thing to have one snapshot, but when you start to have, you know, multiple years of data showing how it's changing over time, that's when you really start to be able to see your progress and see how you're tracking towards things and raise issues that you would otherwise miss. It also is going to keep you organized just by doing this. You're going to be way more organized than the average person. Like I talk to people about money all day long. Very few people attract their net worth. Um, very few people even know what their net worth is. If you're working with us, you know, your net worth, just ask us about it and we can send it over to you.
Speaker 1 00:18:00 But by tracking this, it's gonna allow you to be better organized and be far more organized than your peers. It's going to be top of mind. You're gonna be able to spot those errors that you would otherwise miss. And really, it will save you time when doing other financial stuff, worsening net worth statements, all the time for clients to like their accountants or bankers or the state planning or whatever. You know, when you're doing those kinds of other financial things, they typically want to see like what your net worth is, or they'll ask you for like a personal financial statement or stuff like that. We just we'll send over the net worth statement. And that's typically more than enough to suffice for what you're looking to do there. And so if you've already got it up to date, it's super simple and easy. You don't really even have to complete go through the application, write things down.
Speaker 1 00:18:53 Plus for planning purposes, once you start to have that organized. So any, any, any type of planning, it helps to be organized going into it. Same thing is true with your finances. When you have everything organized like this, it makes it much easier to plan. You can start to set goals, you can see like, okay, I need to build up my cash reserves for emergencies. Um, so, uh, you know, here's, maybe you document that on your network tracker, like the target is, you know, $20,000. And so I need to get there, that's the goal. Um, or maybe you have a goal of building to a net worth or types of accounts to build up or debts to pay off by certain amount of time by having this, uh, you know, well tracked and documented. It puts you in a good position to plan. It's really, I'd say it's a necessity to do good planning, like we're financial planners by day.
Speaker 1 00:19:48 And we really can't do planning without an up-to-date net worth statement. So it's a huge deal. It's, it's almost like an, it's really just a necessity for doing good planning. It's now it's not everything. It's, that's why it's, you know, vitals. I mean, there's multiple vitals. You gotta look at all of them. So it definitely not everything I've already mentioned that it's just one piece of the puzzle. Um, it's a big piece, but it's one, just one piece of the puzzle. Um, and I'll, I I'll keep going back to this, but the number one thing to keep in mind, aside from net worth is your value. So you want to be measuring it from a values lens, ideally it's reflective of what's most important to you, and that's how you measure against it. Um, ideally you use that as a guide for what your, you know, what are you trying to, where are you trying to go with this?
Speaker 1 00:20:36 So if you, if you like the idea of, of, of, uh, tracking your net worth, and you're not already doing it, maybe take a minute to set a calendar invite or a calendar event for yourself. I liked the first of the month, but whatever, um, day of the period you want, or whatever frequency you want nowadays with the electronic calendars, it's incredibly easy to do like a repeating calendar. So maybe you set a repeating calendar or every quarter, you know, for a couple of years, get it on the calendar and that's half the battle. Try it out for a few times. I'm convinced you'll gain a lot of value just from going through this a few times and you'll really latch onto it, but try it out. I'd love to hear how it's going for you. I hope this has been helpful and look forward to catching up again where we talk about our next one as always, thank you so much for joining us today.
Speaker 1 00:21:31 If you found this valuable, please give us a review on iTunes and share with a friend. Also check out our
[email protected] for all sorts of additional content. See you. Next time. Finance for physicians is not an investment tax legal or financial advisor. All content included in this podcast is for informational purposes only and should not be considered financial tax for legal advice. Material presented. It is believed to be from reliable sources and no representations are made by finance for physicians as to another party's informational accuracy or completeness, all information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. You don't have an advisor or like a second opinion. Feel free to check out our website for recommended advisors.
