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Setting financial goals using your Net Worth statement doesn’t have to be complicated. In this highlight, Brian and Bo discuss how to set goals with your Net Worth statement and how to make sure you are doing it right.
For more information, check out our Net Worth Tool. This power-packed tool walks you through what financial metrics to track, calculates your progress, highlights successes, reveals areas that need more attention, and shows your growth over time automatically.
Jared has a question for you guys. He says, “My wife and I have doubled our salary over the past few years. The Money Guy net worth formula is difficult to catch up on. How do I set a timely goal to hit our prodigious accumulator of wealth?”
Jared, first let us say, you’re not alone. A lot of the financial mutants with whom we interact as an audience or even to become clients say, “Hey, I’ve really been advancing in my career fast and my income has been reflected in that. We get these really big pay increases or I have big incentives come in, and while I’m making really great income right now, that wasn’t the case three years ago, five years ago. I was still a really diligent saver three to five years ago, so I feel like I’m behind just based on my income.” So we went to the drawing board and said, “Hey, maybe we should think about an adjustment, a little tweak to the formula to help for some of those higher income folks or folks who have large, volatile incomes through time to make these maybe smooth it out a little bit.”
So yeah, I mean, because we have actually talked about this in content, what we’ve come up with is instead of taking your current annual income right now, you ought to smooth your income. What’s your average income over the last three years, or if you think it’s been volatile for five, maybe your average income over the last five years that accurately reflects the stage of life that you’re in and where your income truly has been? Use that as your income to figure out, well, where your wealth score is now.
I love the idea because Jared said, “What’s the goal?” Or if you want to be super conservative, use this year’s income. If you notice when you go look, if you’re someone who’s using our Net Worth Tool, you go out to learn.moneyguy.com, and you look at our Net Worth Tool, you can see we actually use current year income. We don’t do the smoothing there. We calculate some of the numbers. That’s a conservative approach, and what that should do is help motivate you, help motivate you, help motivate you, help motivate you that you’re kind of trending along that average accumulator trying to figure, “Okay, what do I need to do to start bumping from an average accumulator on my journey to abundance up to a prodigious accumulator?” I think a lot of financial mutants fall into that camp.
Yeah, and also what doesn’t help is a year like 2022 as well. I mean, I noticed on my own, I use the same net worth tool that we offer to you guys at learn.moneyguy.com, is the same net worth that I’m doing. I know it’s the same one Bo’s using, so I look at that net worth dashboard that I have, which is so valuable on kind of seeing where do we fall on that accumulation score, where do we fall in the three-bucket strategy, and where does the visual, because we actually on the dashboard put a visual, so you can see the separation between your investment assets and liquid assets versus just total net worth.
And this year was just kind of a, you know, because it didn’t have that huge appreciation, but here’s why we didn’t build, because like I said, we’ve spent a lot of time talking about this, is that where do you put the threshold of what is somebody who’s got a really rapid increase? Is it 20 percent increases? Is it 50 percent? Is it, as used to describe Jared, y’all’s family household is over 100? Without a doubt, you should level that.
So you have to figure out, is that three years, is it five years? The only person who can know is you, by looking at it. Because if y’all had the same income for the last four years and then all of a sudden it popped in one year, then I’d use a three-year. But if it was something where you were getting a 20 percent pay increase every year and over just through the compounding effect that happened quickly, maybe you need to elongate that average to figure out what you should actually be in. That’s the problem with when you, this is what being math-minded is. You realize all the variables and levers that we all have to pull, and that’s why I love being a financial planner. When we work with clients directly, we get to put all that knowledge of what levers to pull into it. But when we’re creating a product for everybody to benefit off of, we can’t put all that unique stuff. Somebody, when we’re looking at like Roth conversions and stuff, people say, “How long does it take you to do some of these things for clients?” We’ll always be like, “Well, it takes about 20 minutes and 15 years of experience,” right? And it’s that 15 years of experience that we can’t put every little element because these tools are to accelerate your success, but there still is hopefully a graduation point with the abundance cycle where you’ll let us put some of that wisdom and knowledge and experience to work too.
But great question, Jared, and I would also encourage anybody who’s just starting out on the journey, go look at that Net Worth Tool. I love it. I mean, because that three-bucket strategy, looking at what 2022 did to that versus 2021, and we have where you go to the initial data input page where you can change the year toggle, the year that the visuals will change. It’s pretty slick, and I give you a lot of credit. You’re the master on the Excel spreadsheet that kind of makes all that nerdiness work.
