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Before starting our financial freedom journey, we had no idea why we needed to be tracking our net worth. In fact, we weren’t even entirely sure what our net worth number meant or how to calculate it. We just ignored it altogether. After diving head first into the FIRE/FIOR movement, we now know that tracking our net worth is the single best metric for our money and our #1 motivator.
What Exactly IS Net Worth?
Your net worth is nothing more than your total assets minus your liabilities. First, you need to make a list of all your assets and their values. Next, do the same for your liabilities. Add each column together and subtract one from the other.
As long as you can do simple math, you can calculate your net worth. See the formula below! And if you don’t feel like doing it by hand, don’t sweat it. There are online calculators to help you out.
The Super Simple Calculation
Total Assets – Total Liabilities = Net Worth
Assets And Liabilities To Include
My first attempt to calculate our net worth was a total flop. You might be wondering how I could mess up such a simple math problem. I was wondering the same thing. Well, apparently I failed to add one of our assets. A big asset – the equity in our home. That pulled our net worth way down and made me feel a little depressed. Thankfully, I figured out my error and was able to do a simple recalculation. Phew!
Now, there are debates floating around the interwebs as to what you should and shouldn’t consider an asset. Basically, the choice is yours.
Some people don’t list the value of their car because it’s a depreciating asset. Others like to add the value of their vehicle because, well, they own it (or at least a portion of it) and it counts as part of their current assets. It also helps to offset the liability of having a car loan.
Remember, depending on where you are in your life, your net worth might actually be a negative number. Don’t stress about it. Knowing where you stand is half the battle. And by tracking your net worth, you’ll be able to watch as that negative number turns positive. THAT is motivating!
There really is no wrong way to calculate your net worth. Unless, of course, you’re counting liabilities as assets. So, just what is considered an asset and what is considered a liability? Generally speaking, assets and liabilities are separated like this.
- Saving and Checking Accounts
- Home Equity
- Retirement Accounts 401(k), IRAs, etc.
- Investments Held Outside Retirement Accounts
- Car Equity (This will likely decrease over time)
- Anything you own worth considerable value (Collectibles, Jewelry, etc.)
- Credit Cards
- Student Loans
- Car Loans
- Personal Loans
5 Reasons To Track Your Net Worth
So, if you’re sitting there scratching your head wondering if you should track your net worth, let me tell you the answer is a resounding YES. So without further ado, check out 5 reasons you need to start.
1. Overall Financial Health
Having a snapshot of your overall financial health is unbelievably helpful when you’re trying to build wealth. You can be laser-focused on paying down debt or investing, but by tracking your net worth you’ll actually see your progress in black and white.
2. Motivation To Build Wealth
Tracking our net worth has been the single best thing we ever did for motivation.
Whether you’re working on paying off your debt or investing or both, your net worth is going to go UP.
Yes, you read that right. Your net worth is going to go up even if all you’re doing is paying off your car or student loans.
And if you’re in a situation with a negative net worth trying to dig your way out of debt, tracking your net worth will provide massive motivation to keep going.
3. Gauge Your Progress Against Your Peers
By tracking your net worth, you’ll be able to gauge your progress against your peers. Of course, it’s not always the best idea to compare yourself to others. But when it comes to your finances it’s nice to know where you stand.
Just note that most people aren’t reading articles like this and have NO IDEA what their net worth is. So by doing so, you’re setting yourself apart from the crowd. Congratulations! You’re well on your way to building wealth and reaching financial independence.
4. Watch Progress Over Time
Tracking your net worth allows you to see your progress over time. It might not feel like it, but when you’re paying your monthly bills and throwing a little extra toward your loans or house payment, little by little your financial health is getting better. Your personal bar graph is getting taller.
Truth Bomb: I obsessively check our net worth way more than I should, but I can’t help it. I love watching our numbers go up. It’s completely validating to know that taking my lunch to work every day and not buying new clothes all the time is quite literally paying off.
OTHER ARTICLES YOU MIGHT ENJOY:
- Why We Include Our Home’s Value In Our Net Worth
- That One Time I Royally Screwed Up Our Net Worth Calculation
- How To Dig Your Way Out Of Debt When You Feel Hopeless
- 9 Money Hacks That Took Us From The Poorhouse To The Penthouse
- Invest Extra Cash Or Pay Off The Mortgage
5. Helps To Control Unnecessary Spending
When you know your numbers and you’re watching your net worth skyrocket compared to your peers, it becomes a lot easier to control unnecessary spending.
I used to think nothing of going out for lunch every single day at work. Now, I think how much that money would be worth if I invested it instead. These days, I’m opting for the latter in a lot of situations. And our bottom line has never been healthier.
So, what are you waiting for? Start tracking your net worth today!
How We Track Our Net Worth
Personally, we like our time so we love tools that allow us to Set It and Forget It. Because of our lazy mindset, we use Personal Capital. It’s a well-respected, trusted tool that allows you to track your money, including your net worth, quickly and easily. Oh, did I mention it’s FREE? It is. It only takes a few minutes to enter your information into their secure site/app before you’re up and running.
So if you feel like you might want to track your net worth and don’t feel like fumbling around with spreadsheets, I highly recommend you give Personal Capital a try!
And there you have it, 5 reasons you need to track your net worth to build wealth. Since tracking ours, we have made better decisions and increased our savings rate substantially.
Financial Freedom, here we come!