Being a business school graduate seriously makes me love to see money working and the numbers behind it. Over the years of me talking about money, I’ve come to find that seeing calculations and real life numbers can help just about anyone understand their overall financial situation and really start making better decisions about their finances.
I always stress the importance of having a written budget because of all the value it can do for your day-to-day finances. What most people don’t realize is the immense value that tracking your net worth can have on your big picture finances.
Tracking your net worth can be an extreme motivator because seeing that number grow can really get you in the mood to do more work and make it grow quicker. It’s insane how much knowing this number can change your financial outlook.
For all these reasons (and more that we’ll discuss) I think that tracking your net worth is the most important tool if you’re trying to build wealth, and is even more important if you’re trying to retire early.
What is Net Worth?
Net worth is an extremely simple calculation that just about anybody can do. It is nothing more complicated than your total assets minus your total liabilities.
This means that your net worth is everything you own that has value, minus what you owe to other people. Think of it like a financial health snapshot. It shows you exactly how you’re doing financially at any given time.
Don’t be alarmed if you find that your net worth is a negative number. This is fairly common for young people since you haven’t had much time to grow assets and it’s pretty common for you to be drowning in student loan debt.
Reasons to Track Net Worth
1. Great Metric for Financial Progress
Tracking your net worth (monthly or yearly) allows you to see the progress you’re making towards your future and this is insanely useful because it can convince you to make better moves in your day to day life so you can continue to see an increase in this number.
If you see that you’re net worth is growing, you’ll be more motivated to keep that number growing. If you see that your net worth is shrinking, it should be a great motivator for you to increase it for the next time you track.
2. Doesn’t Focus on Income
A lot of people seem to correlate financial success with income when this couldn’t be further from the truth. If your income is growing but your net worth is staying the same (or even getting worse) this can show you a better explanation of how you’re doing than income alone.
Also, there are people out there who are making $30,000 a year who have a better net worth than people who are making $100,000 a year. However, most people would think that the $100,000 a year person is doing better just based on their income alone.
3. Avoids Emphasis on Assets
When a lot of people are thinking about their finances they think just in terms of the things they have and they manage to completely ignore the money they owe. This doesn’t give an accurate representation of how you’re doing financially and can be detrimental to your future.
An emphasis on assets can convince you that it’s a good idea to go buy more things but still end up with tons of debt. Some people who have $200,000 worth of assets have $150,000 worth of liabilities but will only ever talk about the assets.
4. Helps Control Your Spending
When you’re watching your net worth closely, you take a few extra seconds to think about whether or not you actually want something before you buy it.
You’ll see that $50 jacket as a $50 increase in your net worth and although it’s a small change, it’s a positive one that will continue to grow and put you in a better place.
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How to Track Your Net Worth
Tracking your net worth is actually a lot more simple than it sounds, seriously. It’s quick and easy as long as you have all of the numbers ready.
Step One: List Your Assets
Before we start calculating and listing your assets, it’s important that we have a good explanation of what an asset is. So, an asset is anything you own that has value that you can sell for a decent amount of money.
This can include: your home, your car, investments (i.e., 401(k), index funds, etc), savings accounts, high value smaller assets (artwork, jewelry, instruments, etc).
It’s important to factor in the amount of equity you have in bigger items. For example, if you have a mortgage that’s worth $250,000 but you still owe $145,500 on the house, you’d only consider the $104,500 as an asset.
The other $145,500 would be a liability. Many people make the mistake of counting the entire $250,000 as an asset. It works the same way for your cars!
Something to remember when listing your assets is depreciation. What is depreciation? Well, when you buy a new car for $20,000, it loses it’s value every minute you own it. That’s depreciation.
When you’re calculating the value of your car, you’ll want to put the amount it’s worth today, not what you paid for it.
Pro Tip: If you need to calculate the value of your car today, you can check it out at Kelley Blue Book.
Step Two: List Your Liabilities
Listing our total liabilities isn’t nearly as fun as listing our assets. It’s never fun to find out how much money we owe people. It’s nice to see how much we owe because it shows us that we’re making progress every time we make a payment.
Your liabilities can be anything that you owe money to, this includes things like student loans, your mortgage, your car loan, credit card bills, medical bills, etc.
Step Three: Subtract
The final step in calculating your net worth is to do the actual calculation (duh!). Now we’re going to subtract our liabilities from step two, from our assets in step 1.
How to Increase Your Net Worth
Now that we’ve learned how to calculate your net worth, you’re probably wondering what you can do to seriously increase your net worth. It isn’t a complicated process, it’s genuinely as simple as either increasing your assets or decreasing your liabilities.
If I were to choose between increasing assets and decreasing liabilities, I would always start with decreasing liabilities because they are the true harm towards our net worth.
If you want to focus on decreasing your liabilities, you can pay off debt (like student loans, car loans, or even your mortgage). You can also stop using credit cards for things you can’t actually afford since credit card debt is a huge liability for many of us.
What If Your Net Worth is Negative?
A negative net worth may sound crappy, but it’s really possible and extremely common. There is always a chance your net worth can be negative. This just means that you have a lot of liabilities out there than assets which is perfectly okay, for now!
You just need to focus on either increasing your assets or decreasing your liabilities. To start, I would recommend decreasing your liabilities which is usually in the form of paying off debt, like student loans or credit cards.
Small steps can add up quickly to a positive net worth in no time, don’t be discouraged!
Net Worth Tracking in Action
A year ago I met Tasha from one big happy life in a blogging Facebook mastermind and I’ve been constantly inspired by her financial journey ever since. You can see a real life net worth update in this video from their youtube channel:
If you start calculating your net worth once a year you can really see how much progress you’re making with your finances. If you really want to focus your efforts on increasing your net worth, you should be keeping a really close eye on your budget.
If you need a bit of budgeting help, I suggest you check out our comprehensive guide to budgeting: Budgeting for Beignners ~ a 7 Step Guide.
Just like your personal health journey, your financial health only gets better if you work on it every single day. Have you tracked your net worth? Let me know in the comments.