Your Personal Financial Statement: Know Your Net Worth Before You Invest
Book: Real Estate by the Numbers | Authors: J Scott and Dave Meyer | Chapter: 1
Previous: Intro - Real Estate by the Numbers | Next: Understanding Balance Sheets for Real Estate
Here’s a question for you. What is your net worth right now?
Not a rough guess. The actual number. Could you pull it up in five minutes if someone asked?
Most people can’t. And that’s a problem, especially if you want to invest in real estate. Because before you put money into a deal, you need to know exactly where you stand financially. Not just “I have some savings” but a real picture.
That’s what Chapter 1 of Real Estate by the Numbers is all about. It walks you through three simple tools that every investor should know: the Personal Financial Statement, the savings rate, and investable assets.
What Is a Personal Financial Statement?
A Personal Financial Statement (PFS) is just a snapshot of your finances at one point in time. It shows what you own and what you owe. The difference between the two is your net worth.
Here’s the core formula:
Net Worth = Total Assets - Total Liabilities
That’s it. Everything else is just filling in the details.
J Scott shares in the book that the day he first calculated his PFS, he discovered a big negative number staring back at him. It was uncomfortable. But it also gave him something to work with. He started treating his net worth like a game. He’d ask himself every day: what can I do to move that number up by even a little? Over eighteen months, he got it to zero. Then it kept climbing.
The PFS is powerful not just as a tracking tool, but as a motivator.
Assets: What You Own
Assets are anything of value that you own or control. They include:
- Cash on hand and in bank accounts
- Stocks, bonds, and investment accounts
- Retirement accounts (IRAs, 401k, etc.)
- Your personal residence (yes, even with a mortgage on it)
- Vehicles
- Business interests
- Jewelry, furniture, collectibles
One thing the book is clear about: an asset is an asset even if it’s losing value. A car is still an asset. A house with a mortgage is still an asset. The word “asset” has no judgment attached to it. It just means something that has cash value and could be converted to cash.
Assets can be split into two categories:
- Liquid assets - things easily turned to cash within a week, like cash, stocks, and bonds
- Non-liquid assets - things harder to convert quickly, like your home or retirement accounts
Here’s an example from the book. Our fictional investor John has these assets:
| Asset | Value |
|---|---|
| Cash on hand | $200 |
| Checking account | $20,000 |
| Money owed to him | $5,000 |
| Self-directed IRA | $54,500 |
| Stocks | $3,200 |
| Bonds | $800 |
| Business interest (ABC Properties LLC) | $65,000 |
| Personal residence | $185,000 |
| Car | $7,000 |
| Furniture | $5,000 |
| Jewelry | $2,000 |
| Total Assets | $347,700 |
Note that the house is listed at $185,000 even though John has a mortgage. That’s correct. The mortgage goes in a different section.
Liabilities: What You Owe
Liabilities are your debts and financial obligations. Things like:
- Mortgage balances
- Student loans
- Car loans
- Credit card balances
- Estimated taxes you’ll owe
Important: your mortgage is a separate entry from your house. The house is an asset worth $185,000. The mortgage is a liability for whatever balance you still owe. They are paired but independent. If the house burns down, the mortgage doesn’t disappear. If you pay off the mortgage, you still own the house.
John’s liabilities:
| Liability | Amount |
|---|---|
| Mortgage on residence | $138,200 |
| Student loan | $26,300 |
| Car loan | $3,200 |
| Credit cards | $6,800 |
| Estimated taxes owed | $18,000 |
| Total Liabilities | $192,500 |
Calculating Net Worth
Now the simple math:
Net Worth = $347,700 - $192,500 = $155,200
John’s net worth is $155,200. That’s the amount he’d have left if he converted everything to cash and paid off every debt.
A PFS always has a date on it because it’s a snapshot. John’s financial picture will look different in six months, especially if he’s actively investing.
Why Your Savings Rate Matters
The PFS tells you where you are right now. But it doesn’t tell you if things are getting better or worse. For that, you need your savings rate.
Savings Rate = Monthly Income - Monthly Expenses
This is basically an income minus expenses calculation for your personal life. Think of it like a business’s profit and loss statement, just simpler.
Here’s why this matters so much. Imagine you have $24,000 in liquid assets and you invest $20,000 of it into a rental property that earns you $300/month. Sounds good, right? But what if you’re already spending $1,000 more per month than you earn? After the investment, your savings rate improves to -$700/month. You now have $4,200 left in liquid assets. In six months, you’re broke. The “great deal” accelerated your problems instead of fixing them.
Dave Meyer tells a story in the book about a friend who did exactly this. Good deal, great property, but a leaky bucket underneath. Without a positive savings rate, even a great investment can’t save you.
On the flip side, knowing your savings rate helps you plan. If you’re saving $1,000 a month, you can decide whether to jump on a deal today or wait ten months to afford a better one. Sometimes the patient path earns more.
How to Calculate Your Savings Rate
Step one: add up your monthly income. All of it. Salary, side gigs, rental income. If any income is variable, use a three-month trailing average.
Step two: add up your monthly expenses. Everything. Taxes, mortgage, food, gas, entertainment, subscriptions.
Step three: subtract.
In John’s case:
- Total income: $5,000/month
- Total expenses: $4,000/month
- Savings rate: $1,000/month (20%)
That’s a healthy savings rate. John’s net worth is growing by $1,000 every month without doing anything special.
How Much Can You Actually Invest?
Having $24,000 in liquid assets doesn’t mean you can invest $24,000. Financial experts recommend keeping three months of expenses as a cash reserve for emergencies. Job loss, medical issues, surprise repairs. Life happens.
Investable Assets = Liquid Assets - (3 x Monthly Expenses)
For John:
- Liquid assets: $24,200
- 3 months of expenses: $12,000
- Investable assets: $12,200
John can responsibly put up to $12,200 into a real estate deal today. Not his whole $24,200. He needs that cushion.
If you have kids or variable income, stretch that reserve to six months.
What Your Numbers Mean for Your Strategy
No matter what your numbers say, there’s a path forward. Here’s a rough guide:
Both savings rate and net worth are negative: Focus on fixing your savings rate first. You need to be making more than you spend before you add the complexity of real estate. Get the leaky bucket fixed before filling it.
Net worth is negative but savings rate is positive: This is very common. Student loans, mortgages, car loans. You can still invest in real estate with a positive cash flow. In fact, investing can help you pay down that debt faster.
Both are positive: Great position. You have options. You can explore different strategies, take on more risk if you want, or be patient and wait for better deals.
One bonus: by calculating your net worth, you’ll know if you qualify as an “accredited investor.” That’s a designation that opens up investment opportunities like real estate syndications. The current thresholds are $1 million net worth (excluding your home’s equity) or $200,000+ annual income ($300,000 with a spouse).
The Bottom Line
The Personal Financial Statement is not complicated. It’s just honest accounting. Assets minus liabilities equals net worth. Income minus expenses equals savings rate. Liquid assets minus emergency reserve equals what you can invest.
These three numbers tell you where you are, how fast you’re moving, and how much fuel you have. Before you analyze a single deal, know these numbers. They’re the foundation everything else is built on.
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