By Kelly Hodges
Net Worth = Assets (what you own) – Liabilities (what you owe)
Calculating net worth is essentially synthesizing all aspects of your personal finances into a single number. You take every asset you can possibly think of (you can count your 5th grade stamp collection if you want) and subtract all the various sources of debt, and there it is, a number in black and white. It’s a math equation, so there is only one right answer that is difficult to dispute. The process may be unnerving if you haven’t done it before, but it’s definitely worth doing. Here are the top reasons to sit down and calculate your net worth today.
1. See where you are now. I remember vividly the first time that my husband and I calculated our net worth. It was negative $45, 846. Yes that was a painful number to see, but it was our reality and we needed to face it. We needed to know where we were at that moment so we could make a plan to go forward. The great thing about net worth is that it’s constantly changing. You can make that number go up (or down) every week, month, or year based on your everyday decisions. If you calculate a number you’re not happy with, use it as motivation to move that number closer to where you want it to be!
2. Make adjustments. Yes your net worth can change, but only if you take action. Your everyday financial decisions need to be ones that promote increasing assets or decreasing liabilities. This means that if you find a $100 bill on the street you need to put it into your retirement account (building up an asset) or use it to pay down some credit card debt (decreasing a liability). Buying a pair of designer jeans with the money will in no way increase your net worth. This is a silly example, but again it’s the daily decisions to adjust spending towards categories that will increase net worth and away from those that provide immediate gratification but no long-term value.
3. Track your progress over time. This obviously doesn’t need to be done every week, but it’s probably a good idea to recalculate your net worth every few months to ensure that it’s heading in the right direction. Tracking net worth can be a great source of motivation as well. It forces you to set mental goals in an effort to push yourself to keep the overall number moving in the right direction. And if you happen to find your net worth slipping, then simply go back to step 2 and see what other adjustments have to be made. Remember, it’s a marathon not a sprint. So as long as you’re frequently analyzing the situation and making changes as needed, you’ll be better off then if you weren’t tracking it to begin with.
Calculating and tracking net worth is an important financial tool for looking at where you’ve been, where you are, and where you hope to be. Enjoy your weekend, and happy calculating!
Recommended Reading: See Kelly Hodges’ series on Financial Fundamentals, as well as her series on Financial Planning.
—————————————————————-
Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of her employer or any other person or entity.
Follow us on Twitter @seeitmarket and be sure to “Like” See It Market on Facebook to keep up with current news and updates on the site.
