I recently had a discussion with some of my colleagues regarding our personal finances. We talked in particular about retirement numbers and of course my favorite topic, passive income. Throughout our conversation, it quickly became clear that most of them had no idea how much they needed to retire or even where they were along the way.
In fact, most were not tracking what I consider the most important barometer of your financial history: your NET WORTH. I liken the importance of knowing your net worth to the importance of knowing your basic vital signs, for example, your blood pressure. How can you know how healthy you (or your finances) are if you don’t track your vitals?
I'm sure some of you track your stock portfolio daily or your house value on Zillow on occasion. When it comes down to it, if there’s only one single number you track at all, I believe it should be your net worth. That number, more than anything else, is an overall measure of where you stand financially.
How Do You Calculate Your Net Worth?
Net Worth = Assets – Liabilities
Simply put, your net worth is all of your assets minus all of your liabilities. Want to know what an asset is vs. a liability? I went into it in a bit more detail in The Difference Between Assets and Liabilities.
Add Up Your Assets
In brief, an asset is something of value that, in essence, could be turned into cash. To figure out your total asset amount, add up the value of the following items and any money (cash) you have in the bank:
- Stocks & Bonds
- Investment Properties
- Other investments
As a side note, there's quite a bit of debate whether one should include their primary home in their net worth. Well, when I calculate my net worth, I do. It’s been often said that your primary home is a liability (and this makes sense to a degree), but if push comes to shove, you could always sell it and rent if necessary. However, when it comes to determining whether you qualify as an accredited investor, you need to exclude your primary home from your net worth.
I also don't include personal property such as jewelry, furniture, vehicles, or collectibles for these calculations. I find it makes it overly complicated because some are quite hard to value.
Subtract Out Liabilities
Once you’ve totaled up all your assets, you have to subtract out your liabilities. These are things you owe, such as debt on student loans, your mortgage, cars, rental properties, credit card debt, etc.
Most of us start our lives as attendings with a negative net worth. We haven’t started making much money yet, and so haven’t had the money to build our asset column. At the same time, all that schooling and accumulating debt results in high student loan debt in our liabilities column.
Why You Should Track Your Net Worth
Tells You How Financially Healthy You Are
A positive net worth means that your assets outweigh your liabilities. A growing net worth means that you’re doing a good job building assets and minimizing your liabilities.
A negative or decreasing net worth tells you that you’re losing the battle to debt and perhaps need to make some changes.
Will Help You Keep an Eye on Your Debt
Every time you look at your net worth, you're going to have to look heavily at the amount of debt you carry. Some things like student loan debt are a necessary evil to some degree. However, in the liability column will also be consumer debt like credit card & car loan debt.
Knowing how you're doing in that arena and how it's affecting your net worth will consciously make you think about it. It may consciously or unconsciously affect the way you spend money.
Help You Make Smarter Financial Decisions
Seeing exactly how you’re progressing on a monthly basis can be very motivating, even if it only shows you that you need to improve in one area or another. It also helps you maintain focus on what areas need improving. Life doesn’t move in a straight line, and if you want to reach your goals, knowing where you’re at will help you do just that.
Having the focus on continuously increasing your net worth certainly helps put important financial decisions into one of two categories: decisions that build the asset column and decisions that decrease the liability column. I mentioned this above, but instead of spending money on things that decrease your net worth, you might end up spending it on things that beef up your net worth.
How to Track Your Net Worth
There are a couple of ways to track your net worth. The good old-fashioned way is by using a simple spreadsheet. You can use either Google Sheets or Excel, but either way, all you have to do is come up with asset and liability columns. Then set it up so that your total net worth equals your assets – liabilities.
Some people love doing it this way. Perhaps there's something uplifting in typing out huge numbers in your asset column and at the same time, something painful in typing in the large numbers in your debt column.
This method is great because it’s free and very straightforward. It's great to do it this way the first time because you get a deep understanding of where everything is coming from. However, typing out and finding every number individually is also very labor-intensive. I don't know about you but I have savings accounts in multiple banks as well as portfolios on different platforms.
The other way is by using some kind of software or online platform. I use Personal Capital, and I love it. I've also heard good things about Mint.com. I like to track and assess my net worth at least once a month. What I don't enjoy doing anymore is going to each website, logging in, and manually inputting each value into a spreadsheet. I'm all about saving time, so I don’t want to spend a long time calculating my net worth. Using Personal Capital, I log in once, and it's all there for me, with fancy charts, and it even tracks my spending. The good thing is these services are free as well.
So, I would recommend doing the traditional spreadsheet the first time and then see if an online option might work better for you.
So, Track Your Net Worth!
I speak with a lot of smart people who want to be even smarter with their finances. They want a life of financial freedom and go about it by reading tons of books and spending all sorts of money on pricey seminars and techniques.
Before doing all that fancy stuff, what they should be doing is tracking their net worth. Then they can truly evaluate their financial health and know how they’re progressing toward their goal. I can’t state how much of an impact doing this has made to my finances and my goals, and ultimately, it’s helped me achieve financial independence from medicine.
Do you track your net worth? Do you do it manually or by using something like Personal Capital or Mint?