When you hear the term “net worth,” what comes to mind? Do you picture some rich executive sitting on the balcony of his second home meeting with his accountant to discuss his finances? Do you picture yourself in 15 or 20 years?
Well, believe it or not, everyone should track their net worth from the very first time they step out on their own. And it’s much simpler than you probably think.
Net Worth: The “What” and “Why”
Your net worth is the total amount of your assets exceeding your liabilities. In other words, it’s what you own minus what you owe. If your assets are greater than your liabilities, you have a positive net worth. If your liabilities are greater than your assets, you have a negative net worth.
Your net worth isn’t the only number or equation to track, but it’s certainly an important one. It’s like a panoramic snapshot of your financial situation. There are plenty of other calculations you can use to gauge what’s happening in different areas of your finances — savings, investments, income, debt, etc. — but your net worth tells you precisely where things stand at this moment.
“Like the stock market, your net worth will fluctuate. However, also like the stock market, it is the overall trend that is important,” Investopedia mentions. “Ideally, your net worth continues to grow as you age—as you pay down debt, build equity in your home, acquire more assets, and so forth. At some point, it is normal for your net worth to fall, as you begin to tap into your savings and investments for retirement income.”
You can find many general rules of thumb and basic age-based formulas that suggest how large your net worth should be at each age and for each income bracket, but every individual’s financial situation is unique. Rather than focus on reaching a generic plateau, you should set personal financial goals and then work to achieve them.
Tracking and reviewing your net worth over time will help you understand (1) where you currently are, (2) where you want to be, and (3) what you need to do to get from where you are to where you want to be. It can serve as a wake-up call or an encouragement. It can also help you wrap your mind around your overall financial health (which is challenging when you have accounts spread out all over the place).
Practically speaking, getting a clear picture of your net worth should help you budget better, spend more wisely, pay down debt, clarify your saving/investment strategies, and think about retirement with greater clarity.
3 Tips for Tracking Net Worth
Do people track their net worth because they’re financially healthy and want to feel good about what they’ve got? Or do people become financially healthy because they track their net worth? It’s one of those “chicken and egg” conundrums, but for most, it’s the latter. There’s plenty of anecdotal evidence to suggest tracking net worth helps people become successful by giving them the right priorities, clarity, and vision.
Want to get started? Here are a few helpful tips:
Find the Right Tool or System
There are a variety of ways to track your net worth and determine where things stand. They include:
- Calculators You can use a combination of online calculators to figure out your net worth. For example, a home equity calculator will help you determine how much equity you have in your house (which probably represents a large percentage of your net worth). There are also calculators for retirement accounts, other investments, and various forms of debt.
- Apps and dedicated tools. There are a few apps and other online tools that help consolidate finances into a single dashboard so that you can track your net worth in one place. Personal Capital is probably the most widely used, but you can do some research to find one that works.
- Spreadsheets If you like to have total control over the process and don’t need any fancy bells and whistles, a classic spreadsheet can do the trick. Just throw in the right numbers and track over time.
- Be Realistic Make sure you’re being realistic when it comes to tracking your net worth, or you’re doing yourself a disservice. Don’t inflate the value of your home or overvalue other assets just to make your net worth seem bigger than it is. This isn’t helpful and could lead you to make unwise financial decisions in other areas of your life. If you’re ever unsure of something, use conservative numbers.
- Be Consistent Finally, you have to be consistent. The power of tracking your net worth comes from the long-term view of your finances. Every household is different, but you’ll find that you get the most value out of net worth tracking when it’s done on a consistent date every six or 12 months. (June 30 and December 31 are logical dates.)
Adding it All Up
It’s not healthy to spend all of your time and energy focused on your net worth. There will be months and years where it skyrockets, as well as periods where it declines. If you’re too focused on the individual ups and downs, your finances will end up dictating your emotions. Having said that, periodic check-ins with a focus on long-term trends can help you understand where things stand, so you can emphasize the right priorities and course correct when needed.