Have you ever heard someone mention their net worth and wonder what in the world were they talking about? Net Worth is your assets minus your liabilities. (I will share more below about exactly what an asset and a liability are.) Tracking your net worth is the most important financial metric we have. Your net worth represents your entire financial life in just a few numbers. It shows you exactly how healthy you are financially and where you may need to make some changes.
Your net worth is composed of all of the assets you have accumulated. It is also composed of all of your current debts. The difference between these two numbers will give you your net worth.
Tracking Your Net Worth: Assets
The first thing you want to do when tracking your net worth record all of your assets.
A liquid asset is any money you can reach easily. This will include assets such as bank accounts, money market accounts, and cash.
You will want to track the value of your primary residence as well as any investment properties you may own. Real estate does fluctuate so you will need to use your best guesstimate or turn to a website like Zillow. Just know that your real estate number will change based on the market and it is hard to know exactly how it will appraise.
This includes employer-sponsored accounts such as a 401k and a 403b. You’ll also want to include IRA accounts you may have.
A non-retirement investment is any type of investment that is not in a retirement sheltered account. This may include mutual funds or single stocks you have purchased.
Other assets may include the value of your vehicle and personal property such as furniture. If you are truly in a pinch you may want to sell these items. I personally do not track them when calculating our net worth.
Tracking Your Net Worth: Liabilities
Internal Revenue Service
If you owe money to the IRS please move it to the top of your list. This debt should be a priority to pay off because of the power the IRS holds. You don’t want any surprises like your income being garnished for back taxes.
This includes any property that you owe money on. Whether it be your primary residence or a rental property you will want to include the money owed.
Student loans are a major liability, especially in the millennial generation. You will want to include the total amount of private and federal loans you have outstanding.
These loans include anything from a vehicle to a furniture purchase.
Personal loans may include money from family and friends. These loans should be a top priority to pay off because it could ruin relationships.
Credit cards are a revolving debt that will continuously change. You will want to watch these numbers carefully as they will fluctuate especially if you are still using the cards.
If you owe any type of medical bill this should be considered a liability as well even though they normally have flexible payment terms
If you have a large number of liabilities it may be time to sit down and make some financial goals for improving your overall financial health. Liabilities are risky and leave you vulnerable when times get tough.
Tracking Your Net Worth: The Math
When you have these two numbers you can subtract the liabilities from your assets to find your net worth.
Let’s say you have $500,000 in assets and $350,000 in liabilities, your net worth would be $150,000. ($500,000 – $350,000 = $150,000)
Why You Should Be Tracking Your Net Worth
Net worth is the most accurate measurement of wealth.
You’ll start to notice trends in your spending patterns when you are tracking your net worth. You may notice an increase in liabilities every year around Christmas time or an increase in assets every year when you get a bonus. These trends will help you plan financial goals as you continue to improve your net worth.
Tracking your net worth will help you set financial goals. Maybe you didn’t realize how much student loan debt you have. Your net worth will shine a light on these numbers and help you set goals to improve these numbers.
On the flip side, maybe your net worth is increasing a lot each month because you are investing heavily. You may decide to back down a bit to take care of liabilities.
Goal setting in finances is very personal. By tracking your net worth you’ll have a clear picture of your overall financial health that will help you set goals.
Your financial progress will be showcased in your net worth reports. An increase in net worth is a sign of progress in the right direction. If you notice a decrease in your net worth it is time to reassess your goals and evaluate your budget.
Tracking your net worth will give you an overview of your entire financial picture.
When you understand your net worth and track it regularly you have the power to change your financial future. To improve your net worth you need to do two things – either increase your assets or decrease your liabilities. Of course, you can do both at the same time to have a larger impact.
Your net worth is a powerful tool that can be used to improve your life.
Are you currently tracking your net worth? Let me know in the comments below!