Net Worth Milestones
Everyone wants to know their net worth, but after teaching accounting to undergrads, I understand why there may be some confusion on how you find that number. Your net worth is defined as your assets minus your liabilities. Your assets are everything owned while your liabilities and net worth are a claim on who owns those assets. For example, if your only asset was a house (asset) worth $100,000 and you purchased it with a mortgage (liability) of $80,000, then you would have a $20,000 net worth (asset minus liability). The asset is the home and you own 20% of it while the bank owns the other 80%.
In our initial client meetings, we discuss the idea of having a “net worth mentality.” This is a mindset where you are aware of your prior net worth, current net worth, and what you are actively doing to grow it for the future. Tracking net worth is a clear indicator of financial success and progress towards your goals. Many people measure their financial success by their ability to pay their bills on time or make it to the end of the month with money in their checking account, but those shorter-term indicators don’t show how you are progressing towards your long-term goals. We will continually remind you to adopt this mindset.
Many people hope to have a $1,000,000 or even $10,000,000 net worth in retirement, but it’s easy to lose motivation working to such a large goal. That’s why it’s helpful to have net worth milestones that you can work towards as you embrace this mentality. Below is a list of net worth milestones that anyone can strive for and measure against:
As you can see, the first thing people should strive for is just to have a positive net worth... even if that’s just one dollar. It may sound insignificant, but with the majority of people starting off their adult lives with thousands of dollars of car, consumer, and student loan debt, just having a positive net worth is a large accomplishment. Beyond that positive point, the milestones increase in both amount and rate of growth. Obviously, everyone’s situation is different and markets will perform differently depending on when people start, but the time it takes to achieve each milestone should be relatively similar. When first looking at the numbers it may sound unbelievable, especially when you consider that I’m saying it will take the same amount of time to go from a $5,000 to a $25,000 net worth as it will to go from a $250,000 to a $500,000 net worth, but I believe it’s true for two reasons:
With the early milestones a significant portion of your net worth growth is through savings (spending less than you make), while later milestones give you the advantage of compounding investment returns to complement, and at some point overtake your savings;
The more you embrace this mentality the more efficient at it you become as you find new and creative ways to grow your net worth. This may be increasing your income at your current job, starting a side hustle, or just becoming more resourceful at cutting your expenses.
As you take on a net worth mentality, you will be surprised at how quickly your net worth can grow.