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Net Worth = Assets – Liabilities

Three Truths and a Belief:

Truth 1: A High Income ≠ A High Net Worth

Your income doesn’t drive your net worth; what you do with it does. During the ‘what are your intentions’ conversation with my future father-in-law, he told me a story I’ll never forget. At the time, he was a director at a big-name consulting firm. He said he worked with people who made well into the six-figures with multiple homes and cars, and if they lost their jobs, they’d be bankrupt within a few months. A likely combination of over-leverage (liabilities) and keeping up with the Joneses.

Truth 2: A Large Asset Value ≠ A High Net Worth

Low-interest rates have made debt look more favorable than ever. Because of that, buying bigger homes, second homes, and upgrading to luxury cars has been on an upward trend. If you’re putting 5-20 percent down a 1-2 million dollar home, your net worth has only increased marginally. Sprinkle new furnishings, new vehicles, some revolving debt, and your net worth hasn’t moved.

Truth 3: Large Debt Levels ≠ A Low Net Worth

Leverage can be a powerful tool. It provides an avenue to purchase an investment property that we otherwise couldn’t purchase outright. That said, not all debt is created equal. Income from investment properties that provides positive cash flow after covering the debt service isn’t the same as a car payment or carried credit card debt. A handful of investment properties could put an investor’s net worth well into the 7-figures, even if they have hundreds of thousands of dollars in debt. 

Belief: Focus on the Leading Indicator

Investment returns don’t allow you to retire. The returns are a lagging indicator twice removed from what I believe is the most critical activity to retiring comfortably. The leading indicator that determines your success is how much you allocate towards growing your assets.  At its core, how much you save.

Dietitians and personal trainers say you can’t outwork a bad diet. In the same vein, you can’t outperform a subpar saving rate. If you focus on the leading indicator, you won’t have to find the next Tesla or Bitcoin; their boring cousin, the S&P 500, should suffice.