Net Worth 101: A Tale of Two Doctors

I love coaching doctors in our SimpliMD community and I welcome questions that periodically arise. Recently one of our members reached out this this question:

"I've been thinking about retirement lately and heard that tracking your net worth is important. How exactly do I calculate my net worth, and why is it so crucial for retirement planning?"

It's a common question that many physicians face at some point in their careers. After years of dedication to medicine, the idea of retiring or even pursuing passion projects might start to seem appealing. But how do you know when you're truly ready to take that step? One of the most critical metrics in determining your financial readiness for retirement or financial independence is your net worth.

The Tale of Two Doctors

In order to better understand net worth, let’s consider the stories of two doctors, Dr. John and Dr. Mike, whose approaches to their finances couldn't be more different.

Dr. John The Consumer: Dr. John was a dedicated physician, loved by his patients and respected by his peers. However, Dr. John never paid much attention to his finances. He lived comfortably, spent generously, and never really bothered to calculate his net worth. He always assumed that as long as he continued working, he'd be fine. Dr. John worked well past the time he could have retired, not out of passion but out of necessity. Unfortunately, he passed away just a year after he finally stopped working, never truly getting to enjoy the fruits of his labor.

Dr. Mike The Saver: On the other hand, Dr. Mike was what some might call a "super saver." He discovered the FIRE (Financial Independence, Retire Early) movement early in his career and became passionate about tracking his net worth. By calculating his assets and liabilities regularly, Dr. Mike had a clear picture of his financial health. He set a net worth goal and worked diligently toward it, making smart investments and living within his means. By age 45, Dr. Mike reached his net worth goal and retired from full-time practice. He now spends his time on passion projects, traveling, and enjoying life with his family.

The contrast between Dr. John and Dr. Mike’s lives underscores the importance of tracking your net worth. It’s not just about knowing what you have; it’s about empowering yourself to make informed decisions about your financial future.

I am not asking any of you to choose one lifestyle over another; rather, I am suggesting that it's valuable to know your net worth so you can make informed decisions about your preferred future lifestyle.

Why Track Your Net Worth?

Tracking your net worth is essential for several reasons:

1. Financial Awareness: Understanding your net worth gives you a clear picture of your financial situation. It helps you see where you stand in terms of assets (like cash, investments, and real estate) versus liabilities (like loans, mortgages, and credit card debt).

2. Goal Setting: Knowing your net worth allows you to set realistic financial goals. Whether you're aiming to retire early, buy a vacation home, or fund your children's education, your net worth can serve as a benchmark.

3. Decision Making: By tracking your net worth over time, you can make more informed decisions about spending, saving, and investing. It helps you stay on course to meet your financial goals. A practical example is this from life recently was that my wife and prioritized the elimination of all debt from our life before I retired from my rural practice a few months ago. Then a great deal on purchasing an unlisted STR came to us from our realtor. Although it would have been a great deal, we did not want go back in debt too make this purchase. So we said “No”.

4. Retirement Planning: Your net worth is a critical factor in retirement planning. It helps you determine if you have enough assets to support your desired lifestyle in retirement. Without knowing your net worth, you might overestimate or underestimate your financial readiness. To read more about this check out my post From FIRE to ICE: Balancing Retirement Dreams with Meaningful Work.

How to Calculate Your Net Worth

Calculating your net worth is simpler than you might think. It’s just a matter of subtracting your total liabilities from your total assets.

Here’s how to do it:

1. List Your Assets: Include everything of value that you own, such as:

   • Cash and savings accounts

   • Investments (stocks, bonds, mutual funds)

   • Real estate (primary residence, rental properties)

   • Retirement accounts (401(k), IRA)

   • Personal property (cars, jewelry, collectibles)

2. List Your Liabilities: Include all of your debts, such as:

   • Mortgage

   • Student loans

   • Credit card debt

   • Car loans

   • Other loans

3. Subtract Liabilities from Assets: Net Worth = Total Assets - Total Liabilities

The result is your net worth.

Tools for Tracking Your Net Worth

In today’s digital age, you don’t have to calculate and track your net worth manually. There are several tools and apps designed to help you keep an eye on your financial health.

In a recent comparison of financial planning tools, New Retirement vs Empower each tool offers unique features that can help you stay on top of your net worth.

• Empower: A well-known app for tracking net worth, Empower provides a clear view of your assets, liabilities, and overall financial picture. It's user-friendly and connects to various financial accounts for easy monitoring.

• New Retirement: This tool is particularly beneficial for retirement planning. It allows you to input detailed retirement plans, including future income and expenses, and gives you a comprehensive view of how your net worth will change over time.

Both tools can help you stay on top of your net worth and make informed decisions about your financial future. I personally use empower and love it.

The Bottom Line

Dr. John and Dr. Mike's stories remind us of the importance of being proactive about our financial health. Whether you’re aiming for a traditional retirement or looking to achieve financial independence early, tracking your net worth is a vital step in the process. By understanding where you stand financially, you can make informed decisions that align with your long-term goals, ensuring that you can enjoy the fruits of your labor, just like Dr. Mike did.

If you’re a physician looking to accelerate your path to financial independence, consider taking my course, "Creating a Practice Without Walls." Physicians who own micro-corporations tend to grow their net worth faster than traditional employees. As a special offer, use the code "EARLYBIRD" for 50% off the course. This is your opportunity to take control of your financial future, just like Dr. Mike did, and ensure that you have the freedom to pursue your passions when the time is right.

Don’t wait until it’s too late. Start tracking your net worth today, and empower yourself to make the most of your financial future.