How frequently do you calculate your net worth? Personally I do it daily, not because I’m vain about my finances, but because I use a tracking software that makes it super easy to check it every day.
Seeing how my net worth moves up and down keeps me motivated and knowledgeable about every aspect of my finances. We will discuss the reasons for tracking net worth and the method for automatically tracking net worth later but first let’s define and calculate it.
What Net Worth Is
Net worth shows you, if you sold everything you owned and paid off all of your debts, how much cash you’d have.
Net Worth = Assets – Liabilities.
I recommend using a spreadsheet or physical paper before you use the automated method we’ll talk about later so that you have an intimate understanding of your finances. The more you write out aspects of your finances, the more likely you are to tackle them and get them under control.
First add in all of the things you could sell for money. That includes any currency, investment, physical property, and maybe even intellectual property. These are your assets.
Second subtract all of the things you owe. That includes mortgage, car loan, student loan, payday loans, credit card balance, and that $1,000 you owe to your dad. These are your liabilities
The end result of this list is your net worth.
Why Track Net Worth
First and foremost, there are a multitude of people who have a negative net worth. Usually this stems from taking on student loan debt, credit card debt, and vehicle debt. When I graduated college I technically had a negative net worth though only by a couple thousand. It motivated me to get my financial act together as fast as possible.
Now I can track my net worth growing and it keeps me motivated to ensure the graph goes up and to the right every couple of months and definitely every year. Of course it is probably likely that some day there will be another market crash and the graph will have an outlier year, but in general the hope is to see the upward trend.
Many people stumble from paycheck to paycheck and are not concerned about their whole financial picture. When you keep an eye on your net worth, however, it keeps you motivated.
How To Automatically Track Your Net Worth
Now that you know how to calculate your net worth, and know what to do with that number, I recommend tracking your net worth automatically.
Hands down the best way to do this is with Personal Capital. It is a free program in which you connect all of your financial accounts with them and they track the entire picture of your finances in one place.
I have my bank accounts, 401k, investment accounts, Paypal, credit card, mortgage, and home value all tracked with Personal Capital.
They show your net worth in big letters in the top left of the page when you log in, but you can also dig in and see graphs and charts of your net worth. They have quite a few other elements to really give you a full picture of your finances, so I recommend them to all of my readers.
Improve Your Net Worth
If you have good financial health, your net worth should improve naturally. I described what I think is the most important metric for good financial health in this post about cash flow.
Essentially if you earn more money than you spend, you have a positive cash flow but you also have opportunity. You can use that money to pay off debt or make investments. Both of those activities increase your net worth.
One of the biggest purchase you’ll make that will really hurt your net worth is a vehicle purchase. Vehicles depreciate, which means they lose value over time. If you buy a $30k vehicle, someday it will be worth $500 in scrap metal. If you keep it during that time, your net worth will decrease by $29,500 as a result of that car purchase.
Avoid big hits to your net worth until you have a large net worth in which case you can afford small hits to it. But when people say they can “afford” a car payment you should think to yourself “but can you afford a $30k loss in net worth?”
Now clearly you get some good driving value out of the car, it enables you to drive to work and anywhere else you need to go. But so does a $5-$15k car. You can typically find a vehicle well under $15k that still have all of the new technologies and will last 10 years, and it is a good way to avoid a major hit to your net worth.