Accurately Measuring Your Net Worth

Many investors do this. They tout or write what they think they're worth on their balance sheet. This usually includes all kinds of assets, some more difficult to measure than others. 

Money market accounts, treasuries, T-bills, bonds. If you sold those assets today, you would receive a specific amount of cash. It’s pretty easy to figure out what your net worth is or what the equity is in those assets.

But let's take other assets. A business. Real Estate. Can you figure out how much your business or piece of real estate is worth? 

Or how about other illiquid alternative assets like energy, oil, gas, working interests? These are more illiquid and more difficult to delineate the actual worth.

You can use what Zillow says a piece of property is worth. Zillow may register a house at $250,000. In our discussion, someone said, “Well, that's not market. That's just an appraised estimated guess.”

Someone else said, “Well, the way you really figure out what you have is, you sell it. If you have to pay some closing costs to get that asset sold and pay some taxes, then what you net out after that is your real equity.”

That's how you know what you have. Until you sell an illiquid asset to the market, you really don't know the dollar value amount you have in your hands.

When to Sell an Asset?

My question is, “Why would you sell a good asset with quality equity?”

Here are a few main reasons to do so:

1. If you need liquidity, the cash to cover some obligations. You might need to sell an asset and take what you can get. The more motivated one is, the more discount one is willing to take on that equity.
2. You may have an opportunity to take the cash from that equity, put it somewhere else, and get a better or more reliable return.
3. Maybe you’re planning ahead for the current illiquid asset. Let's say it's real estate. It's had a good run, but the property is in an area with a declining tenant base, or the demographics are starting to slide. It may be time to divest that asset and move that equity somewhere else. 

Other Ways to Measure the Value of Equity

Besides selling it, I measure the value of equity by assessing the quantity and quality of the distributions that equity produces.

Let’s think about it. Why do we want a net worth in the first place? We grow and accumulate it for what? It’s not to keep it stashed away forever.

What is wealth worth if it doesn't produce something for us?

Yes, there can be a growth component that we don't see for a few years. I'm not opposed to growth, but in the end, wherever your nest egg is – the stock market, practice equity, real estate, etc. – you want it to produce replacement income eventually.

You also need to consider the quality of your equity. How strong is the production of income from that asset? How reliable is it? Is it risky? Does it fluctuate a lot, or is it relatively strong?

What's the quantity? What is the actual dollar return on that equity? What's the return? Does it meet the market for my risk and needs?

That's how I measure equity. I don't care what the marketplace says my equity is worth unless I need to sell it or want to sell it.

I care about the quality and quantity of the replacement income it produces. Examining your wealth, wealth building, and investments will give you a much better idea of what you really have or need.

Don’t Get Hung Up on a Number Set by Someone Else

Too many get hung up on what they’re told by a financial advisor or what they’ve heard from someone else. “Well, I need 10 or 15 million dollars to retire.”

Do you really? How do you know if you haven't assessed where you can invest that capital to get a predictable, sustainable, reliable income stream?

It could be a lot less than you think. But you haven't been trained or learned to discern how to allocate your capital other than just putting it in the equity markets or the stock market.

I'm not opposed to having money in the stock market, but that's not where you want all your capital. The stock market is an accumulation game dependent on the growth produced. Once you accumulate what you deem is enough, it becomes a depletion game.

I'd instead accumulate and grow during my active income-earning years when I don't need the replacement income while simultaneously learning how to take that capital base and turn it into replacement income.

When you exit active income and “retire,” you are then set up for a stable income independent of your going to work.

What Assets Can Replace Your Income?

The best assets that can produce replacement income, in my experience, are alternative investments. A few stocks pay dividends but don't typically pay a lot. If you stay in the stock market, you’ll still deplete your capital.

I’d want to invest my capital in something that generates a reasonable, market-based, and dependable return.

I can do that in real estate. It’s where I put most of my capital, diversified between different assets at different times in the economy.

It’s not always in equity. Sometimes, it’s in private credit. Allocations between alternative assets in equity or private credit are another level of discernment.

Do I Have Enough?

This is the big question everyone has when they come to Freedom Founders. “I'm thinking about selling my practice. I just don't know if I have enough…”

We're usually so busy making money and running our business that we don't learn how to make our money work for us.

Knowing your actual net worth or the total worth of your equity is a key to freedom in life; you just have to figure out how to measure it. How much income does it or can it produce for you?

Take the time to learn how to do this. It will provide more clarity for your practice exit, selling your business, or “retirement.”

That's my provocation for you in 2025.