How Can You Track Your Net Worth? Why Does It Matter?
Have you ever wondered what your net worth is? How much are you really worth financially? Just because Sally the Saver has $100,000 in the bank doesn’t mean she has a higher net worth than Ian the Investor who only has $14,000 sitting in the bank. You need to look at the whole picture.
Net worth takes into consideration all of your debts, liabilities and assets. Calculating your net worth will give you the birds eye view of your finances.
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Why tracking Net Worth Matters
It is very important to add net worth goals to your list of financial goals. If you set a goal of saving $10,000 this year, but you don’t take into consideration any debt you might incur, you might end up finishing the year with a lower net worth than you began with!
By setting net worth goals, you will be taking a well-rounded approach to your finances that includes all aspects of your current finances.
Tracking your net worth is also the best way to track your financial progress every year. You can either do this manually with pen and paper, or create graphs that will allow you to see your lifetime progress.
In order to calculate your net worth, you’ll need to know what your assets and liabilities are. Read on to find out how!
What Is An Asset?
Assets include all of the money sitting in your bank accounts, retirement accounts, and everything you could potentially sell for cash. These can also include valuable jewelry, artwork or other items that can be easily sold for a substantial amount of cash.
This is where things can get tricky. Some consider cars and houses as assets, but if you do this, you’ll have to include what you still owe on them in the liability calculation.
If you decide to include your car and house, then you can use the market value estimates that Zillow and Kelly Blue Book provide to determine how much to include in your assets column.
Assets add to your net worth. They are the positive aspects to your net worth.
To illustrate the net worth calculation, let’s use Allie’s current financial situation as an example. Below are all of her current assets. She does not own a house so this was not included.
Example:
Checking Account: $8,000
Savings Account: $25,000
Retirement Account: $45,000
Car Market Value: $5,000
Total Assets: + $83,000
Allie’s total assets are $83,000! She’s almost at $100,000 which is wonderful! Let’s take a look at her liabilities and debts in the next section.
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What Is A Liability?
Liabilities are all of your debts, loans, medical bills, and credit card balances. If you’re considering cars and houses in the asset section, then be sure to include what you owe on the auto loan and mortgage in your liabilities.
Liabilities are the negative aspects to your net worth. This is everything that you will subtract from your assets.
Earlier we calculated Allie’s assets. Now let’s take a look at her liabilities.
Example:
Car Loan: $8,000
Student Loan: $56,000
Credit Card Debt: $10,000
Total Liabilities: – $74,000
Allie’s total liabilities add up to $74,000. This is the value we will subtract from her assets in order to determine her net worth.
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How To Calculate your Net Worth
The net worth calculation is very straightforward! You just add up all of your assets and then add up all of your liabilities and subtract the liabilities from the assets. In math terms it is:
Net Worth = Assets – Liabilities
In order to calculate this you can either use a good old calculator and a pen, an Excel sheet, or this easy-to-use net worth calculator from NerdWallet.
Using Allie’s total assets and liabilities from the example earlier, what do you think her net worth is? Is she in the positive or negative?
Let’s calculate it and find out!:
Allie’s Net Worth = Assets – Liabilities
Allie’s Net Worth = $83,000 – $74,000
Allie’s Net Worth = + $9,000
Allie happens to have a positive net worth! This is great! But, just because she’s in the positives, does not mean she can’t improve her finances. She should be focusing on paying off her debts, especially the high interest credit card debts.
If you have calculated yours and it turns out to be negative, don’t be shocked! Personal finance is different for everyone and many people have student loans, car loans, or mortgages which lead to having a negative net worth. This is nothing to be ashamed of. Your net worth is not equivalent to your self worth.
Not all debt is inherently “bad”. Student loans can help you improve your career, a home can lead to more memories with your family, and a car can get you to work safely. Just make sure you’re tackling your high interest debts in your fight towards positive net worth! If you don’t know what to prioritize financially, here’s what you should do with your next paycheck.
Knowing your net worth will allow you to track your progress better. Like I mentioned earlier, just because your friend has more cash sitting in the bank does not mean your net worth is higher than yours. But, just because you have positive net worth does not mean you should ignore your debts.
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How To Track Your Net Worth
You can either manually check back in with your net worth (at least 2-4 times a year) to see how your progress is looking, or you can sign up for services like Mint and Personal Capital which will track your net worth for you.
If you pair your net worth progress tracker with your preferred budgeting methods, you will be able to reach your financial goals faster! Don’t know what budgets will work better for you? Check out this cashless budgeting method as well as the cash envelope method!
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