Calculate Your Net Worth in the Military | Military Money Manual Podcast Episode 90

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Starting your journey to Financial Independence might seem daunting at first, but calculating your net worth is a necessary first step.

Spencer and Jamie discuss what exactly net worth means, how to calculate it, and how to identify debts and assets.

Outline of Episode:

  • What is net worth? And how do I begin to figure out what my net worth is?
  • Debt
  • Assets
  • Helpful resources

Military Money Manual Podcast Episode #90 Transcript

[00:00:00] Spencer: You might be in the situation where you have a negative net worth, and that's okay. That's where a path to financial independence can begin. 

[00:02:03] Jamie: Welcome back to the military money manual podcast. I'm Jamie. And I'm here with Spencer Reese from militarymoneymanual.com. 

Today we want to talk about net worth. What is it? How do you calculate it while you're serving in the military and afterwards? And it is a relatively simple topic, but comes up sometimes.

People just don't know. They've never been taught how to calculate it and what it means. So let's get right into it, Spencer. 

What is net worth? And how do I begin to figure out what my net worth is?

[00:02:29] Spencer: So net worth is a simple calculation of what you own minus what you owe. In other words, your assets minus your liabilities.

Assets are anything that has value. So for most military service members, it's going to be your car, possibly your home if you own it, or you have a mortgage on it. It'll be money in your checking or savings account, money in your TSP or Roth IRA, then any stocks or bonds or ETFs or mutual funds that you purchased outside of your TSP or Roth IRA.

Liabilities are going to be anything that you owe money on or money towards. So usually a liability is a loan to a bank or to another person. Military troops might have auto loans, famously there's always the E-2, the E-3 who shows up to their first unit and buys the $60,000 Mustang at 29% APR.

Doesn't get a very good deal on it.

[00:03:20] Jamie: Dude, does that actually happen? Is that still happening today? Or is it just like an old joke?

[00:03:25] Spencer: It's definitely an old joke. I think especially with the Military Lending Act, a lot of that has been pushed to the side. But I do see a post occasionally on Reddit where guys are like, Hey, my airman showed up and he's driving the Mustang and has 29% interest.

[00:03:38] Jamie: That's pretty tough.

[00:03:40] Spencer: But yeah, so liabilities is a loan that you owe. You owe money to a bank or to another person. It'll be an auto loan, it could be a mortgage if you bought a home, VA loan, if you're a graduate of one of the military academies or ROTC or OTS, you might have a career starter loan and to calculate your net worth, you're going to take your assets, you're going to subtract your liabilities, and then that's your net worth.

It's a pretty simple X minus Y equals Z. Sounds so easy. It is.So for example, if you have a car that you could sell for $20,000. You have $5,000 in your checking account and you have $5,000 in your TSP. So $20,000 plus $5,000 that's $30,000 of assets. Now let's say you owe $10,000 on your auto loan and you still have a $10,000 debt on your CareerStar loan.

So you owe $20,000, you have liabilities of $20,000 total. To figure out your net worth, you just take your assets, $30,000, minus your liabilities, $20,000, and there you go. $10,000 is your net worth. 

So is that good? Is that bad? No, it's neither. It's just the reality of the situation. And I think that's one thing that we really want to make clear today, is net worth is not good, it's not bad, it's not, it can be a point of comparison, but really all you should be doing is figuring out what your net worth is in this moment, recognize that's just a snapshot in time, And then use that as a baseline to either reduce your liabilities, so pay off your debt, increase your assets, so grow your wealth, and over time, you'll see your net worth grow.

[00:05:18] Jamie: Okay, so that seems pretty basic, but it sounds like I have some homework to do to figure out, first of all, what all my liabilities are. So maybe I'll start with my debt. So a situation that I talked about before on previous episodes of when I was a newlywed, just got married, just commissioned as an officer in the Air Force, and we were about $118,000 IN debt with my wife and I combined.

So we looked at things like our student loans, our career starter loans, we each had one of those, credit cards, loans from mom and dad. We didn't have back taxes or medical debt, you're looking at any account that you owe on, you need to go find that whether it's an online account or the last statement that came in the mail.

Hopefully you have an online account to make it easy. But you just simply need to find the balance and start totaling all of that up. Take inventory of it and write it all down. And it can be painful sometimes to acknowledge The situation that has developed in your life or for your family, it's not meant to beat you down or make you feel like less of a human or like a terrible person or father or mother or officer or sergeant.

It is just simply a recognition of, like you said, Spencer, of where you are right now. And it's the first step in making goals in the future is just writing down all the facts that we have as it stands today.

[00:06:30] Spencer: Yeah, just like you said, Jamie. It's a recognition of what is the current situation. So in the military, we talk a lot about situational awareness.

It's understanding. Okay, what, what is happening? And for a lot of people, they just have their heads in the sand and they don't know what their net worth is. And if you talk to them, they'll say, Oh, yeah, one day I want to buy a house or I want to buy this new truck or I want to be financially independent.

But they don't even know what their net worth is. And you have to pause and think, okay, just take that first initial step. And like you said, Jamie, it can be painful. I remember when my wife and I, we started our spreadsheet of our assets and our liabilities and calculating our net worth.

And to actually confront that number can be a painful process when you're like, Oh, negative $66,000. That is a big hole that we need to dig our way out of. But you can't even begin to dig your way out of that hole until you recognize that you're in a hole. And so that's why it's so important.

If you do have the desire to become wealthy, if you do have the desire to become financially independent, you have to take inventory of where you are in this moment and then… Start taking the steps to get towards your goal. It's just so many things in life. Fitness, right? If you have a fitness test coming up and you need to run that mile and a half or that two miles in a certain amount of time, you better go run a mile and a half or two miles right now and figure out, okay, am I going to be able to pass that test?

Or do I need to start training for it? And same thing with weight loss. If you hop on the scale, and it gives you a number, you have to believe what that number is, or you're never going to be able to start a journey towards getting towards a healthier weight. It's the same thing with calculating your net worth.

[00:08:19] Jamie: Yeah, absolutely. But what I love about net worth is it's not just a beginner's problem or for people who are behind. Net worth is important to understand for advanced or high income earners as well, because it's going to inform those decisions. You mentioned earlier, buying a car, buying a house. I've talked to dual income majors before who have maxed out their TSP for several years and didn't really understand the concept of net worth or just how far they've come in their journey.

And they never took a second to pause and appreciate the progress they've made, which is just as sad in some ways as someone that has no idea they're $200,000 in debt.

[00:08:55] Spencer: Okay. So Jamie, you opened this up there talking about debt and all the different various forms of debt that people might have.

Let's pivot now and talk about assets. So for most people, that's going to start with their bank account. If you're in the military, You are 99.99% paid by direct deposit. I don't think there's anybody out there anymore. There's probably like one National Guard guy out in Missouri who's still paid by check.

But DFAS has moved everybody to direct deposit and you signed up when you commissioned or you enlisted and you'll probably have a checking account and it could be your personal checking account. It could be a checking account that you share with a partner or with Your spouse might have a checking account and I think this might be a good time Jamie to talk about as well For most couples, it's important to calculate your net worth as a couple as a combined unit, and I know a lot of military couples, whether they're married or not, will keep completely separate finances.

And that's fine. If that works in your relationship, that can be fine. But I found that it can be so much more valuable if you treat assets in your marriage as part of the marriage, as part of your joint property. And then that way, you're working towards your goals together as a team and you're not just having one person pulling a heavy burden in one direction and the other person dragging their feet in the ground and making it even harder to get to financial independence.

[00:10:30] Jamie: Yeah. And hopefully your goals are the same. So it adds up and it's both people pointed in the same directions. 

Other than checking accounts, we're going to have other potentially liquid accounts like a savings account.

You just want to total all that up. So if you have one at one bank and one at Navy Federal and one at USAA and one at your local credit union, whatever you have, just total it all up. Could be earmarked for vacation or for your next car. Or for emergency funds, which some people say what's an emergency fund?

We'll talk about that in a second. Whatever you have in these kind of liquid savings accounts, just total that up. 

Quick side note on emergency funds. So emergencies obviously cause stress in your life. We've probably all experienced that unless you're prepared. And when you're prepared by having an emergency fund, it helps protect your net worth and your emotional health by having money saved.

So whether it's a car repair, house issues, the kid gets sick. You didn't get paid on time, another government shutdown rumor, whatever it is, having money saved up can help reduce the anxiety and stress that comes with emergencies that we all experience in life. So usually we say something like start with a small starter emergency fund, maybe $1,000, a little bit more if you want to, that's okay.

Once you get ahead some, then you can come back and get at least three months because we have typically a nice stable job in the military. Some people will say three to six months. If you're close to separation, maybe you want to go up higher than that, but three to six months of savings. And that's not your income.

It's your actual expenses. So If you have $10,000 saved up in your emergency savings, for example, then that $1,000 car repair is no big deal, or the short notice trip that cost $2,000 to fly home for a loved one's funeral, it's going to sting a little bit and you're at that time of grieving. In the bank, it's not going to have the same impact as it would while you're dealing with the emotional side of losing a loved one because you can cover the expense. And so that's how emergency savings is so vital to your net worth calculations and protecting it in the future.

[00:12:25] Spencer: And we talked more about military emergency funds in episode number 51 of the podcast.

You can go back to episode number 51 or militarymoneymanual.com/ep51 and check out we did a Q& A on military emergency funds. 

Okay, so that's talking about bank accounts, talking about more of the liquid assets. You could add in cash in there as well. Some people keep a ridiculous amount of cash around their home.

Hopefully not under the mattress. Oh yeah, hopefully not. And then the next level up from kind of those liquid assets or the more illiquid assets and that might be. What some people traditionally call investments. So that could be the Disney stock your grandmother bought you years ago and is sitting in a Schwab account that you completely forgot about.

It could be the TSP balance that you know that you're, you've got an agency match of 1% going into there, but you have no idea what's actually happening there. Why don't you take this opportunity to set up an account on TSP.gov and actually take a look at what is your TSP balance and then add it into your net worth.

It could be the crypto app or Robinhood or whatever investing app that your buddy at work had you sign up for because they were going to get 25 of Bitcoin. Then the app collapsed and you lost thousands of dollars. Thanks a lot, buddy. It could be your Roth IRA, or it could be a spouse if you're, adding up your net worth as a family unit.

It could be your spouse's 401k or 403b if they work for a non-profit. It could also be a bunch of miscellaneous assets, too. Like we talked about earlier, cars, collectibles, maybe you got some really high value Pokémon cards. It could be your house. With the recent run up in housing prices, if you were lucky enough to buy a house before 2022, you might have some substantial additional net worth that's locked up in your house.

[00:14:23] Jamie: Okay, so now that we've looked at all this situation where we have our debt, our investments, our savings, we've looked at all of our liabilities and all of our assets, you have a calculation what you mentioned earlier, where let's say I've now determined I have $20,000 in liabilities between my student loans and my credit card debt.

And I have $50,000 in assets between my savings account, my TSP, my car's realistic value, and my starter emergency fund. So therefore, I have a net worth currently of $30,000 in this example, $50,000 in assets minus liabilities. So $20,000 in liabilities, and then that gives me a net worth of $30,000. So like you said, it's as simple as assets minus liabilities equals net worth.

[00:15:05] Spencer: And the two examples that we've used here, Jamie, is the person has had positive net worth, but I know when I first did the calculation and for actually for several years, it took me to take my way back to zero, my net worth was negative and for a lot of people, especially if you're just getting started in the military or just graduated college or you just enlisted or let's say, you recently started in the military and you just went out and bought a car.

And guess what? If it was a new car, as soon as you drove it off the lot, the value of that car probably decreased by at least 5 or 10 percent. You might be in the situation where you have a negative net worth. And that's okay. I think that's the biggest message I want to get across to people, is it's okay if you go and add up your assets and your liabilities.

And you're like, hang on, minus a minus. I'm going to get a negative answer here. That's okay. It's okay to be in the red, as we say, to not have a positive net worth. Even if you're in your late 20s, 30s, 40s, it's okay if you can recognize that and say, okay, is this the situation that I want to be in where I owe the bank or I owe other people more money than I own?

That's not a path to financial independence, but that's where a path to financial independence can begin.

[00:16:26] Jamie: That's powerful. And I think it's important for people to understand they're not alone in this. Both you and I have given probably overly intimate details of how we started our financial journeys of sharing our numbers and where we started.

When you start, one of the things that you do is you start tracking it and you look, you don't need to look at it daily, you don't need to look at it maybe even monthly, but semi-annually, something like that. And then you start to see this progress. 

So Spencer, what are some tools you have any practical recommendations as far as apps or resources where once we have our net worth, we can start looking at it and then next year we see it get better.

And the next year we see it get better after that. And then 20 years from now, we look back and say, wow, we really did something powerful here.

[00:17:08] Spencer: Yeah, so the simplest place I would start is just a Google Doc, Google Spreadsheet or an Excel Spreadsheet. Make sure you back it up to the cloud so you don't lose it.

But I've actually got a Google Doc that I've been keeping updated for over 11 years now, since 2012. And I even went back and added some historical data. I was able to figure out okay, the day or the month we got married, like what was our approximate net worth? And I think that's… Probably the simplest thing you can do, and it's super simple.

So it's just okay. In the first of every month, I take how much money is in our checking account. I add how much money is earned in our investments. How much money is in our savings account? I add up all those numbers. How much money do we owe? And at the very end, it spits out a net worth number. 

The other thing I add to that spreadsheet as well is a 4% rule calculation.

So this gets a little bit more advanced, but for anybody who's interested in FIRE movement or Financial Independence, Retire Early. I take my investments and I multiply it by .04, so the 4% rule, and divide it by 12 and I get a monthly income that my investments can generate. And that's been pretty powerful to watch that number creep up from initially just a couple dozen dollars a month to a couple hundred dollars a month to a couple thousand dollars a month.

And notice that, okay, even if we stopped working right now, whether voluntarily or involuntarily, we would have assets that we could sell off. We would have dividend income coming in and we would have some way to support ourselves and we're going to be okay. 

So the lowest level there is the Google Doc.

Next up, I would offer mint.com or YNAB.com. Both of those apps are fantastic for both budgeting and tracking your net worth. And then finally, it costs about $150 a year. So it's a little bit more expensive than YNAB and Mint is also free, but they do have a 1 a month version right now, but I'll offer Kubera.

It's definitely more advanced. You don't need it if you're just getting started. I'd probably hold off until you're at least in the six figure net worth range to sign up for Kubera, but it is a pretty powerful app and it's where I'm doing all my net worth tracking these days. 

[00:19:24] Jamie: Spencer, recently I found an old Google Doc, and I was looking for the very beginnings of my network tracker, I couldn't find all the way from the beginning, but the first year that I have a tracker for net worth was when our net worth was $15,000.

So we definitely started in the negative, but being able to look back on that and see it grow. And once you really start being intentional with your investing, you'll see that number grow very quickly, several hundred percent, sometimes in a year. As you start maxing out your TSP and your IRAs and all that, so it can be very exciting when you start tracking this, but if you don't feel the excitement today, that's okay.

You'll get there one day, and this is just the first step in that journey. Becoming aware of your current situation.

[00:20:06] Spencer: Yeah, like we talked about in one of our previous podcasts, the first $100,000 is the hardest. And after that, the hundreds and the thousands and the hundreds of thousands start stacking pretty rapidly.

And it's pretty impressive and pretty awesome to watch that compounding interest just grow faster and faster. I hope that you guys got some value out of the podcast today. If you're enjoying the episodes that we're putting out, you can leave us a five star review on Spotify or Apple. We really do appreciate those awesome reviews that you guys are leaving.

You can reach out to us, podcast@militarymoneymanual.com or Instagram @militarymoneymanual. And we'll catch you in the next episode.

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