What is My Net Worth and Why Does It Matter?
Net worth is a confusing concept for some people, but it’s much easier to understand than you may think. It’s also a very useful personal finance tool. My wife and I track our net worth on a regular basis. It’s helped us get a much clearer view of our finances, and it can do the same for you, too.
What is My Net Worth?
Net worth is essentially how much money you would have if you sold everything you owned and paid off all your debt.
Technically, the formula is, “Assets – Liabilities = Net Worth.”
If the resulting number is negative, then you owe more money than your assets are worth, and you have a negative net worth. If you have a negative net worth, don’t freak out. You can work to change that negative number into a positive, growing your net worth over time.
Examples of Assets
Assets are items that have value. While technically a t-shirt could be considered an asset because you could sell it for a quarter at a garage sale, most people only count larger items in their net worth. Personally, the smallest item my wife and I include in our net worth is our cars, but some people don’t even include those in their calculations. We also include any real estate we own, all bank accounts, investment accounts, and other monetary accounts or cash we may have on hand.
Examples of Liabilities
Liabilities are debts that you owe. When it comes to liabilities, my wife and I list everything we owe, no matter how small it may be. We include items like mortgages, tax debt, car loans, credit card debt, personal loans, loans from friends or family members, and even late bills that need to be paid.
The Importance of Net Worth
Your net worth represents a snapshot of your financial picture at a given point in time. If you calculate your net worth multiple times over a certain period, you can determine whether your net worth is consistently increasing, decreasing, or staying about the same. Of course, the goal is to increase your net worth over time until you reach a point where you can eventually become financially independent.
When my wife and I notice that our net worth has taken a dip, we check to make sure that everything else is going fine with our finances. If our net worth has decreased due to a decrease in investments, we usually shrug it off, since we’re long-term investors and know the market will eventually recover. However, if our net worth is decreasing due to spending our cash reserves, we figure out what is happening and how to fix it.
How Often Should I Track My Net Worth?
Tracking net worth is a personal decision, so how often you track it is up to you. I would recommend that you do it monthly, but many people track their net worth quarterly, twice a year, or even only once a year.
Tracking your net worth more frequently gives you better insight to your finances.
That’s why my wife and I track ours monthly. After all, I’m a personal finance blogger. That said, you must also realize that many items may not change on a monthly basis, while other items – like investments – may make wild swings from month to month due to the performance of the stock market.
Things to Keep in Mind When Tracking Net Worth
Your net worth is a constantly changing number. Don’t worry so much about short-term swings, but instead focus on the long-term pattern. If your net worth is increasing at a reasonable rate over time, then you’re probably on the right track.
Sadly, even increases in net worth can be deceiving. You could be spending more than you earn and increasing your consumer debt, even with an increasing net worth. You would just need to have enough growth in your investments to offset the increasing debt. Unfortunately, when your investments suffer a decrease in value due to a stock market crash, your finances could be in much worse shape than you ever imagined.
For that reason, it’s important to realize that net worth is just one piece of the financial picture. You still need to track your income and expenses, as well, to understand everything going on with your finances.