Not knowing what your net worth is like navigating without a GPS. You might get to your final destination and you might not. You could arrive where you plan to be by accident or you could show up on purpose. Take the latter option. Understanding your net worth should become a part of your overall financial picture just like your knowing the amount your bank accounts or loans are. As you continue reading, you may realize your net worth is far more important than most people like to think it is.
Table of Contents
- How To Calculate Net Worth
- Why Does Net Worth Matter?
- Tools And Apps For Tracking Net Worth
- Conclusion
How To Calculate Net Worth
Before calculating anything, let’s identify the two broadest terms when it comes to net worth: assets and liabilities.
Assets are defined as an item of property owned by a person or company, regarded as having monetary value. Briefly, these can be categorized as:
- Value of primary residence
- Retirement account
- Investments
- Savings account
- Checking account
- Car value
- Real estate property
- Life insurance policy
- Stocks
- Bonds
- Business
You may consider things like vintage sports cards, antiques, or furniture as assets. It is at your discretion what you consider valuable. Generally, sticking to the list provided above should compile the big- ticket assets.
Any money owed to another person or entity is a liability. This includes:
- Mortgage
- Auto loan
- Student loan
- Rental property loan
- Home equity loan
- Credit card debt
- Personal line of credit
- Home equity line of credit
Simply put a liability is debt. An agreement made to another person that you promised to pay back in full. You are legally responsible for the amount owed on those items. Some have pre-determined pay off dates like a 30-year mortgage while credit cards accrue interest until they are completely paid.
Here is the formula. Sum up all of your assets along with all of your liabilities, then subtract the two numbers. If the value of assets are greater, you are in the green and are positive. If the value of your liabilities are greater, you are in the red and bear a negative net worth.
If you’re looking at your net worth right now, is that number vastly different than what you thought it would be? If your true net worth is far below zero, don’t fret it. Your net worth does not determine your self worth. If it was, the entire world would be full of billionaires.
Having a starting point gives a leg up on your future trajectory. Many people go through their adult life assuming they are doing well financially but really aren’t. It isn’t because they’re self centered, they just don’t know what they don’t know. That’s a scary place to be with personal finance.
If your salary or high paying job were the only indicator for financial success, you are missing a huge piece to your financial puzzle. Simply saying, if you make $100,00 in annual income but spend $125,000 trying to live up to society’s “standards”, you are holding yourself hostage from ever achieving financial success.
At least after figuring out your net worth, you know what direction you are heading. At that point, you can figure out if that path is the ideal path or pivot to a different one. You really don’t know anything about your financial health until you’ve figured out that number.
Why Does Net Worth Matter?
Treat it like your personal finance report card. You can quickly see a birds-eye view where you’re succeeding and where you’re lacking.
Let’s say you think you need to beef up your savings? After looking closely at the numbers and researching, you see that your credit card balance is slowly creeping up. Maybe depositing more into the savings account isn’t as important as paying off debt. It usually isn’t if you have a substantial emergency fund socked away.
Use your net worth to tell you how financially healthy you are. This number is personal to you, and only you. It shouldn’t be used to compare to other individuals or self judgement, it is a picture of where you are currently at the moment. That is extremely important to know. Like Peter Drucker said “What gets measured gets managed and what gets managed gets done”.
Measure your net worth against where you want to be not where you currently are.
Looking back in 2013, when I first began tracking our net worth I knew that I wouldn’t keep us there, financially, forever. But it took that moment, the moment I actually sat down and measured our net worth, for me to make the positive change I needed to increase that number. In fact, tracking our net worth has become part of a monthly routine. At the end of every month, I sit down, login to our accounts and calculate our net worth. These numbers are stored on a spreadsheet for me to review month to month and year to year. From there, I will make adjustments to our finances to continue toward the path of financial independence. We aren’t there yet. Actually we aren’t even close. But every month, little by little, we are inching to that end goal.
What your personal net worth goal is is exactly that, personal. You will build an intimate connection to achieving that number. The financial marathon you are entering feels slightly more bearable with an end goal in mind depending where you’re starting from.
The frequency of which you check your net worth is particular to you. Some will check it quarterly or every six months. Others only wish to see their number once a year. Personally, I like to know our number every single month. This gives me ample time to sit down with Mrs. Simple FI and discuss our plan for the coming four weeks.
Whatever time frame you choose, just build a habit to religiously check it often. Take the time to understand what is happening with your finances. No one else should care more about your financial situation than you.
Give yourself an honest evaluation from time to time. If your liabilities are slowly rising, look into how you can reverse it. Assets been stagnant for a while, embark on deploying more money toward your savings or investments.
Tools And Apps For Tracking Net Worth
There are many ways to track your net worth from just writing it down to more tech savvy approaches. No single way is the only way. In fact, I started out by writing out my net worth in a notebook. This was pre-family, pre-mortgage, pre-investment days so it was really easy to handle. But writing them down built a strong connection for me with my finances. I knew exactly where every dollar was going and what my plan was for every new dollar I’d receive.
If you’d rather write out your net worth, go for it. I’ve definitely evolved from my former days. Now I data dump all our finances onto a Google Sheet simply titled “2020 NW” dating back to 2016, when my finances really began (second child, paying for child care, life). This allows me quick access to check it instantly.
Many other apps will help you as well. Some will require a recurring payment but there are a few free apps out there too.
Mint, a free online budget planner, will store all your accounts providing you a snapshot of where you are financially. It focuses more on budgeting but can still be a useful tool when starting out.
Another free app is Personal Capital. Many say this is the best software program out there for net worth tracking but be aware that you will receive numerous sales calls so use a fake phone number when signing up.
Other alternatives include:
- YNAB (You Need A Budget)
- MoneyPatrol
- Quicken
- Tiller
- Banktivity
- CountAbout
- Status
- Every Dollar
- Goodbudget
- PocketSmith
- Moneydance
These alternatives are current at the time of writing this post as of April 2020.
Conclusion
Closing out the discussion of net worth and its importance, you don’t know where you’re going if you don’t know where you are. As simple as that sounds, many people will think they’re heading in the right direction or focusing on the proper financial aspect just to find out they aren’t. They go months and months trying to do the right thing for themself and their family but never took the time to figure out their financial worth.
Tracking our net worth has helped tremendously with my financial awareness, staying laser focused, and proactive planning. Sitting down and assessing our net worth every month makes me feel like a six year old on Christmas day. Where are we heading to? What is the next step? Everyone has to find what excites them when it comes to finances. It can be boring when it’s stagnant. That’s when you begin moving your dollars around where it makes sense. Without tracking our net worth, I feel lost like having no road map. But knowing what that number is, I am in control of our finances.
Take control of your finances by tracking your net worth.
“Make it a policy to know your net worth to the penny” — T. Harv Eker