To the average American, especially those in lower and middle classes, we probably don't think about our net worth much. We aren't trying to make it on the Forbes 400 list of the richest people in America, so why would we keep tabs on it? Is there a benefit to understanding and tracking net worth? Let's find out.
Net worth = Everything you own (assets), minus minus everything you owe (liabilities)
Example:
Assets | Liabilities |
100,000 Home value | 95,000 Home mortgage |
10,000 Car value | 5,000 Car loan |
5,000 Cash in checking/savings | 10,000 Credit card debt |
15,000 Retirement account values | 15,000 Student loans |
--------------------------------------- | ----------------------------------------- |
$130,000 total assets | $125,000 total liabilities |
130,000 - 125,000 = 5,000 net worth |
This may seem like arbitrary information, but it represents your very real financial position. I recommend totaling your net worth at least on an annual basis, and more often if there are financial goals you are actively working to achieve. Here are some benefits to the average American of knowing and consistently tracking your net worth.
1. It gives you a yardstick by which to measure financial progress
Sometimes when we are picking away little by little on paying down debts and saving, it can feel like we aren't making any progress. Progress is especially hard to measure when things change, like we sell one car and buy another, consolidate debt, etc.-- it can be hard to track if ultimately we are advancing ourselves. However, if on January 1, 2021 your net worth is $7,891, and on January 1, 2022 your net worth is $15,284, you know that you have made progress, regardless of what shifts have taken place during the year.
2. It provides motivation to change financial habits
Looking at your financial life in the form of an equation can really motivate you to create and pursue goals. It's easy to feel like you're doing fine when you have cash in the bank, but when you see how your debts can meet and exceed that amount, putting you into an overall deficit, it pushes you to pay down debt, save, and change spending habits.
Summary
Tracking your net worth over time will help to measure financial progress and provide motivation to change financial habits.
Net worth is how I measure my clients' financial progress; in my experience it has been a very impactful and motivating factor to them. Using this tangible measurement, you can use certain milestones as reasons to celebrate, like when you pass from having negative to positive worth, every time you hit another 10k (which for some people can takes years), and so on. Now your turn--try calculating your own.
​What you own (assets) | What you owe (liabilities) | ​ |
Bank accounts (checking, savings, money market accounts) | Credit cards | ​ |
​Investments (brokerage, retirement, etc. accounts) | Loans (student, home, vehicle, equity, personal loans) | ​ |
​Fixed assets (vehicles, property, valuable jewelry, campers, boats, etc) | Other (money owed to family members, anything that may not fit into the above) | ​ |
Total assets - | Total liabilitites | = Net worth |
Give it a try and let me know how it works for you!