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Everyone has a net worth and it’s very simple to calculate.
Net worth = Assets – Liabilities
- Investment accounts
- Retirement accounts
- Value of your home (optional)
- Businesses you own
Liabilities are your debts, which include:
- Student loans
- Car loan
- Credit card debt
- Taxes owed
A lot of people don’t have strong finances and the last thing they’re going to keep track of is their net worth.
However, I think it is important to track and here is why:
Demonstrates where you stand financially
Many people think they have healthy finances if they earn a high income or if they’re able to afford their expenses. However, those are not true indicators of where you stand financially.
An individual can earn $200,000 a year but still have a negative net worth.
Unless they plan on working forever, this is not ideal.
Once you become aware of where you stand you can begin to increase your net worth.
Helps you create a plan
If your net worth is negative, you’ve got to figure out how to get into the positives.
You can create a plan for getting out of debt and increasing your investments.
Remember, a large portion of your net worth should be made up of retirement and investment accounts. The money you have invested will be the money you survive off of when you do retire and/or when you can no longer work.
In order to retire comfortably, you’ll want to aim for a specific net worth number.
If you continue to have a negative or low net worth as you age, it well get harder and harder to increase it as you age.
Demonstrates the importance of your investments and the power of your debts
Again, because many people don’t even acknowledge their net worth, they don’t have a true understanding of the importance of investing and the power of their debts.
For example, you may choose to finance a $30,000 car with an annual income of $50K because you can afford the monthly payment.
However, that immediately decreases your net worth and takes away from money that could be invested to increase your assets.
Debt is powerful because it is an opportunity cost to invest money instead (your monthly debt payments).
Investments are important because that money will work on it’s own (via compounding interest).
Track your progress
I didn’t start tracking my net worth until late 2019 or so and I definitely wish I started earlier because of this reason.
I’ve always been aware of how much debt I had, but not my net worth.
I LOVE to see/track my progress and I know my net worth was significantly lower in 2017/2018 and I would love to see my specific net worth throughout time.
Progress is very motivating to me and I love to see my net worth chart!
However, it’s better late than never!!
How to track your net worth
Personally, I use Personal Capital which is free and easy to use.
Simply create an account and connect all of your bank accounts, lenders, investments accounts, etc.
The information is stored their (safely) and Personal Capital will keep track of all the fluctuations for you.
If you’re a spreadsheet nerd and willing to dedicate the time to enter your numbers each month, you could also do it manually.
You can enter all of your assets and liabilities and set up the proper calculations.
Then of course you can create your own graphs as well.
How often should you track your net worth?
I check my net worth at least once a month (on the last day of the month). Sometimes I check more but that is just out of curiosity.
It’s not healthy to become obsessed with it and definitely not necessary.
Just be sure that you’re doing what it takes to increase your net worth!
Even if you have a lot of debt and know your net worth is negative, start tracking it!!
It will help you to make smart financial decisions and increase those assets!