Beyond The Portfolio: Net Worth

 

When people think about financial health, they often focus on a single number: Net Worth.

It’s an important measure, reflecting the total value of your assets minus your debts. That said, net worth alone doesn’t tell the whole story. To truly assess your financial health, it’s important to look beyond the numbers and consider other aspects of personal finance, such as liquidity, tax location, risk management, long-term planning, and even mental health.

While net worth is a great place to start when assessing financials, focusing exclusively on net worth can be misleading, especially if your wealth is illiquid, poorly diversified, or highly vulnerable to risks.

Let’s take a deeper look at some of the other important considerations:

 

 

1. Liquidity: Access to Cash is King

 

The value of liquidity is often underrated. 

Liquidity refers to how quickly you can convert your money into cash without suffering significant losses.  This is incredibly important as opportunities and challenges arise throughout life, and having access to use money in those situations can give you a leg up.  Having a high net worth tied up in illiquid assets or retirement accounts might look impressive, but if you can’t access cash when you need it, you could suffer financial setbacks.

For example, liquidity can help you play defense in the case of an emergency or unexpected situation where cash helps manage a short-term financial hardship.  Additionally, it can also help you be opportunistic and long-term oriented, like taking a lower-paying job that offers better upside over time or providing the seed capital to start a business or achieve a dream.  Making sure that you have ample access to your money allows you to make strategic decisions on your own terms over time.

 

2. Risk Management: No Risk is Worth Taking when the Consequences are Unacceptable

 

Building wealth is only part of the equation—protecting it is equally critical. 

Risk management includes strategies like insuring uncontrollable risks, properly diversifying your investments, and making an estate plan to safeguard your assets from unforeseen events.

From an investment perspective, this can look like overconcentration in a specific stock or business.  From an insurance perspective, this might look like underinsuring for your potential death or disability.  These issues expose a financial plan to the potential for serious downside that is outside of our control.  Ultimately, it’s better to build a plan that manages these risks in a thoughtful way while still providing a confident path to financial success.

 

3. Tax Location: It’s Not What You Earn, It’s What You Keep!

 

Net worth doesn’t directly reflect the tax implications of your financial decisions.

Where your assets are held—tax location—can have a significant impact on your after-tax returns and long-term financial goals.

For example:

• Taxable accounts provide a high amount of liquidity, but they come with more taxes in the form of tax on capital gains and dividends.
• Tax-deferred accounts (like IRAs and 401(k)s) allow for tax-sheltered growth, but withdrawals are taxed as ordinary income, which could be a good or bad thing depending on your tax rate at that time.
• Tax-exempt accounts (like Roth IRAs) grow tax-free and can allow access to contributions (in the case of a Roth IRA).  While tax-free income sounds great, if you have to pay too much tax to get there, it’ doesn’t necessarily make the most sense.

It’s important to consider how much of each bucket you should have, how to contribute to or fill those buckets, and what to invest in within each to maximize the tax benefits available!

 

4. Long-Term Planning: Having a Plan Makes a Difference

 

Did you know that studies show that people with a financial plan are (on average) 15% wealthier than those without?

Having a plan allows you to create an actionable course to financial success, which in and of itself makes you more likely to work towards those goals.  A financial plan should encompass goals that you have over the course of time, not just retirement.

 

5. Mental Health: Wealth Isn’t the Only Measure of Success

 

While financial metrics like net worth are important, they’re not the ultimate key to happiness or fulfillment.

Studies have shown that we need more than money to be happy. In fact, sometimes, the pursuit of a larger net worth can come at the cost of other essential aspects of life.

Here are some of the important components (besides money) that drive your happiness:

• Fun and Enjoyment: Life is about more than accumulating wealth. Without room for fun, hobbies, and relaxation, the stress of financial pursuits can lead to burnout.
• Deep Work and Fulfillment: Engaging in meaningful work that aligns with your values brings a sense of accomplishment and purpose, which is more fulfilling than simply increasing your net worth.
• Connection to Others: Building strong relationships and maintaining social connections are crucial for well-being. If the pursuit of wealth isolates you from friends and family, your emotional health may suffer.
• Purpose and Legacy: A sense of purpose—feeling like you’re part of something bigger than yourself—provides direction and long-term satisfaction. For many, this could mean charitable giving, supporting causes, or mentoring others.
• Growth and Learning: Personal growth, learning, and self-improvement are fundamental to happiness. Financial freedom should give you the ability to explore new interests, develop skills, and grow as a person.

Striking the right balance between financial goals and personal fulfillment is tricky. Chasing a higher net worth at the expense of mental health, relationships, or personal development can ultimately lead to dissatisfaction. True wealth isn’t just measured in dollars but in the richness of your experiences and the connections you cultivate.  Keeping this top of mind as you make decisions over time is harder than it seems.

 

Ultimately, it’s important to take a holistic approach to your financial health. While net worth is a valuable metric, it’s only one part of the financial puzzle. By taking a more comprehensive view—considering liquidity, risk management, tax efficiency, long-term planning, and mental health—you can build a robust financial strategy that supports both your current needs and future aspirations. A well-rounded approach not only helps secure financial success but also leads to a more fulfilling and balanced life.

 

 

Thanks For Reading! We Hope To See You Again!

For More Updates:

 

Advisory services offered through National Wealth Management Group, LLC, a Registered Investment Adviser. This information is intended for educational purposes and is not intended as a recommendation to buy or sell securities. Investing involves risk. Before investing, you should consult with a financial advisor to determine how a specific investment strategy fits your personal goals and objectives.