Part of your journey to financial freedom is learning how the “rich” think and speak.

So, it’s important to know the metrics you should be tracking to increase your odds of success over the long run.

One of these terms is called – net worth allocation. It’s just a fancy way of saying how much of what makes up your net worth.

And, you can figure this out manually with my spreadsheet, or you could use a web app like Personal Capital to help.

But, before we do any of that, let’s make sure we understand what we’re talking about here.

The Terminology

Assets are anything of value.  They can come in many different forms (cash, stocks, coins, savings, real estate/business equity, etc.) and can be categorized into logical groups called classes.

Net worth allocation is a term used to describe where you hold ALL of your assets by class.

You may also hear the term overall asset allocation, used interchangeably with net worth allocation.  However, I think overall asset allocation could become confusing with a more familiar term, asset allocation, which only refers to the mix of your equities (stocks, bonds, etc.).

Determining Your Net Worth Allocation

When you’re a kid, this is pretty simple. You might have a wallet/purse with some cash, a savings account at a bank, and some collectibles (baseball cards/jewelry).

Let’s say you have $25 in cash, $50 in a savings account, and the value of your baseball card/jewelry is $25… your total assets would be equal to $100. By simply dividing the asset class by the total value of all the assets, you can quickly figure out how much you hold (percentage) in a particular asset class. In our example, your net worth allocation would look like this:

Simple enough right?

Maintaining Balance

A good net worth allocation is typically balanced so that you are not overexposed to any one asset class.  It’s also important to understand the pros and cons of each asset class you hold so you can evaluate the risk and reward potential.

Pros

1. Cash – It’s liquid, accessible now to purchase anything
2. Savings – It has the ability to grow (via interest); protected by the FDIC
3. Collectibles – In addition to its value, you can also enjoy it on a personal level

Cons

1. Cash – Loses value over time to inflation
2. Savings – Can incur fees if a minimum balance not maintained
3. Collectibles – Could be hard to liquidate

In the beginning, tracking your net worth allocation is a piece of cake, but as you begin accumulating more and more assets over the course of your career, you should make it a point to keep an idea of what the big picture looks like.  (We can’t manage what we can’t measure).

My Current Net Worth Allocation

For a real-life example, I’ve provided you my current net worth allocation by asset class as a percentage below.

The Breakdown

As you can see I hold assets spread across 8 different asset classes. (*technically some of these may not be classes, but it’s how I like to break it down personally)

P2P Notes

P2P (Peer-to-Peer) Notes – 0.7% – These are Lending Club notes that I invest ~$25 at a time. P2P Notes are quickly becoming a favorite of mine.  These peer-to-peer investments allow you to purchase a portion of someone’s debt-based on their “score” and in exchange, you receive a proportionate piece of their loan payment.  You essentially get to act as the bank and will want to hold many different notes to spread your risk. My current return is ~12%, but suspect it will lower over time as defaults typically occur later in the life of the loan (36 months to 60 months are the 2 loan options).

Life Insurance

Life Insurance – 1.5% – This is a universal policy that has a cash value to it.

Alternative Investments

Alternative Investments – 1.6% – This includes jewelry, precious metals (gold, silver, platinum, etc.), and collectibles.

Notes

Notes – 4.0% – This refers to promissory notes or trust deed investments that I typically will make through sites like Realty Shares.

Cash

Cash – 6.3% – This is composed of cash on hand as well as liquid savings/checking bank accounts. I like to keep at 6%-10% in Cash because it functions as an emergency blanket and gives me peace of mind.  I can also put this cash to work if I come across any killer investment deals without having to liquidate other assets.  However, I don’t want too much cash because the savings rates are terrible currently.

RE - Primary

Real Estate – Primary Home – 17% – This is equity within our home we live in currently.

Equities

Equities – 31% – This includes stocks, bonds, ETFs, mutual funds, etc. Aside from real estate, Equities are my next largest asset class.  This includes my rollover IRAs, Roth IRAs, Regular IRAs, and misc taxable accounts.  Again, I’ll need to cover this asset class in more detail at another time, but historically speaking you should be able to do well with average annual gains in the 9%-10% range with minimal effort (i.e. dollar-cost averaging into index funds). 

RE - Income Properties

Real Estate – Income Property/Rentals – 38% – This includes rental homes and is one of my favorite asset classes.  At first glance, you will probably notice that I’m heavily weighted in Real Estate.  This is because Real Estate is one of my favorite asset classes. The main reasons being that I can leverage money from a bank, improve the property value myself, and it provides additional tax benefits at the year-end.  (I’ll write up a separate post on RE later).  However, this doesn’t mean that all real estate investments are equal.  It takes a lot of work and diligence to find and purchase the proper real estate investment.  But if you do, it can pay you for life.

DIY (at first)

Anyhow, I’d suggest reviewing your net worth allocation on an annual basis at a minimum.  I would also advise you do this exercise manually with some type of spreadsheet initially because going through the process helps you to internalize your allocation.  You can download my Excel spreadsheet below for free.

Download Link

Once you’re comfortable with the process, you can always use other programs or websites (Personal Capital or Mint) to help you to dynamically consolidate your assets into a centralized dashboard.

For further thoughts on this topic, check out – Recommended Net Worth Allocation By Age And Work Experience by Financial Samurai.

And, if you’re comfortable with this, consider budgeting as your logical next step – How to Budget Like A Bad Ass.

Thoughts

I will periodically review my net worth allocation and make adjustments based on certain market conditions.  As you get older you will begin to see some patterns with the economy and become accustomed to the bull and bear markets.  Different markets will boom and bust at different times, so it’s nice to have a balanced net worth allocation to counteract any one asset class from controlling too much of your overall net worth.

As you further gain confidence and develop more experience, you can begin to anticipate some of the slower markets (let’s say real estate for example) and increase or decrease your allocations depending on where markets are headed.

However, I wouldn’t ever recommend doing this with the stock market unless you really know what you’re doing.  (I’ve been humbled too many times in the past.)  Stick with dollar cost averaging (you get to invest during the booms and bust) into whole market index funds (ex. VTI) for the long haul and you’ll be fine!

Remember, everyone’s net worth allocation will be a bit different depending on your age and risk tolerance.  However, by looking at your overall assets, you may be surprised how weighted you are in one particular area, or not.  Take the time to shift allocations to levels that you feel comfortable with.

Readers, after looking at your net worth allocation, which asset classes are you the most heavily weighted?  Are you happy with your current allocations?

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Michael Quan

After reaching FI in my mid-30's, I left the traditional 9-5 workforce and began focusing on what matters - becoming a better family man, blogger, and investor.

My extended goal is to help you find your personal path to financial independence, and to enjoy the entire journey along the way.

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