Can Tracking Your Net Worth Make You Rich? Why Yes. Yes it Can.
Do you know your net worth? A recent study conducted by global consulting firm Deloitte found the average millennials net worth to be just $8,000.
That’s a 34% decline in net worth of Americans aged 18 to 35 since 1996.
If there is one thing that separates those with great financial health and those with poor financial health, it’s the ability to track progress on financial goals.
In other words, tracking your money is absolutely vital to building long lasting wealth and living a financially free lifestyle.
But what is the make up of ones net worth? How do you calculate it, and why is it important to regularly track it? Here’s what you need to know:
You Need To Know Your Net Worth
Knowing your net worth allows you to properly align your financial goals with your current financial scenario. Understanding it will not only give you a general understanding of your financial health, but also allow you to better understand multiple financial concepts associated with your personal finances.
What’s The Definition of Net Worth?
In order to properly understand what net worth is, let’s take a look at a few official definitions of the concept:
BankRate.com: Net worth is the value of all assets, minus the total of all liabilities. Put another way, net worth is what is owned minus what is owed.
Wikipedia.org: Net worth is the value of all the non-financial and financial assets owned by an institutional unit or sector minus the value of all its outstanding liabilities. Since financial assets minus outstanding liabilities equal net financial assets, net worth can also be conveniently expressed as non-financial assets plus net financial assets. Net worth can apply to companies, individuals, governments or economic sectors such as the sector of financial corporations or to entire countries.
Investopedia.com: Net worth is a quantitative concept that measures the value of an entity and can be applicable to individuals, corporations, sectors and even countries. Simply stated, net worth is the difference between assets and liabilities. Positive net worth means that assets exceed liabilities while negative net worth describes the opposite scenario.
An asset is anything that has monetary value. Some examples include: real estate, your personal possessions, cash, investments, and gold.
A liability is, in most cases, a debt owed to someone. It can also be anything that costs you money to maintain and ultimately decreases your total net worth. Examples of liabilities include: mortgage debt, credit cards, personal loans, and physical property that decreases in value or costs money to maintain.
Now, enough with the financial jargon and boring definitions. Let’s get down to the English version of what the meaning of net worth is. Taking into consideration the above definitions, we could define net worth in these simple terms:
Our Definition of Net Worth
If you were to sell all your personal items for cash, and then pay off all your debts, your net worth is how much money you would have left over. Your net worth can be a positive or negative number. It is the total cash value of all your belongings minus all your debts.
How Your Net Worth Is Calculated
Calculating your net worth is easy. Here’s how to get started:
1. Make a list of all your cash, investments, retirement savings, bank account balances and other investments. Add up the total balance of each of these accounts.
2. Make a list of all your personal items worth over $100. This includes things as large as the value of your house, your car and even things as small as your electronics worth over $100. Add up the total value of your personal items.
3. Make a list of all your debts. This includes any bank loans, student loans, mortgages, car loans, and credit cards. Add up the total balances of each debt for a total value.
4. Add the totals from step one and step two for a total value of all your “Assets.”
5. Step 3’s total is your total value of liabilities. Subtract the total value in step three, from the total value in step four. In other words, subtract all your liabilities from all your assets.
The answer is your total net worth.
Here’s a quick equation for visual learners:
-Total Assets (anything with monetary value) – Total Liabilities (all debts) = Your Total Net Worth
Example: Net Worth Calculation
John and Jane are ages 35 and 34 years old. They have the following total assets and liabilities:
– $570,000 (Total Assets) — $410,000 (Total Liabilities) = $160,000 Total Net Worth
How does this information help John and Jane? Let’s assume they have a goal to save more money for retirement. How can they reach their goal?
A viable options might be to pay off debt to free up some monthly debt payment obligations.
Or, perhaps they decide to sell their cars and downgrade and thus a lower monthly payment. Either way, knowing their net worth helps them make an appropriate plan to achieve their financial goals.
Why You Should Be Tracking Your Net Worth
There are so many benefits to track your money tracking your money. Here are just a handful of reasons to start today:
1. You Will Know What to Do Next
Knowing your net worth is like having a map to get to a destination. If you don’t know where your destination is and where you currently are, how are you supposed to plan on how to get there? Regularly tracking your money will be enough effort to naturally increase your total wealth regardless of your financial goals.
2. You Will Know When You Can Stop Working
To live on a $50,000 income in retirement, did you know you will need to have at least $1,250,000 saved?
If you retire in 30 years and inflation is 3% on average, your retirement savings for a $50,000 income jumps to over $3,000,000. If that number doesn’t scare you or motivate you to track your money, I’m not sure what will! Otherwise you’ll be working for the rest of your life.
3. You Will Avoid Common Financial Mistakes
Perhaps you’ve heard the phrase “out of sight, out of mind…”? Naturally, if we don’t see it, we forget about it. Not calculating your total net worth can have similar consequences of not understanding how bad (or, hopefully how good), your financial health really is. Financial planning eliminates the risk of allowing your financial health to grow poor.
4. You Will Be Prepared for The Future
Calculating your net worth is just one piece of the puzzle when it comes to budgeting. Knowing what you have and what you owe allows you to calculate what you can afford. Furthermore, you can plan for future events such as weddings, large purchases, education, vacations, and whatever else your heart desires.
5. You Can Achieve Financial Freedom
Financial freedom means you have enough money to choose whether you want to work or not. If you no longer have a need to work a regular full-time job because you have enough money to take care of your living expenses, you have achieved financial freedom. Tracking your money allows you to plan for and properly adjust your finances to achieve this great milestone.
6. You Will Find Happiness
They say money can’t buy happiness. While that is true to an extent, it’s also true that money is one of the number one causes of stress among families today. In fact, when it comes to marriages (for example), it’s the number two reason people end up divorced. Keeping track of your finances gives you the peace of mind that your finances are in order, and that you’re in control of where your finances are headed.
7. You Can Help More People
When you’ve mastered your finances and regularly track where your money is going, before you know it, you’ll find real wealth. And as your wealth grows, you will have the ability to extend a helping hand to others. This can include giving your time and even providing your resources to help contribute to a cause you strongly believe in.
Tools To Track Your Net Worth
Imagine a life where you know exactly where every dollar you own is allocated. You know exactly how much money you need to save in order to start that business you’ve always dreamed of or how well your passive income streams are doing.
If you love to keep things simple, open up an Excel sheet and start writing things down. But if you want a more advanced approach, Personal Capital is one of the best money trackers on the market. With it you’ll be able to auto track your income and expenses. And keep every aspect of your financial life in one place.
Strategies For Building Your Wealth
Now that you know where you stand financially, you’re probably ready to start growing your wealth. The first step is to create what some would call an emergency fund. I, on the other hand, like to call it a freedom fund. With it, you’ll have the freedom to say “F-U” to anything that doesn’t align with who you are.
To create this freedom fund, you’ll want to open a high-interest savings account. A few great ones include CIT Bank and BBVA. Both often have interest rates above and beyond regular banks. Open an account now before rates go down.
Next, you’ll want to grow your income. Maybe you want to create a passive income stream, start a business, land a new job, or take an online class that will help you command more money. Whether you choose one or all of these things, you’re already on your way to a life filled with more freedom and more success.