You go to the doctor’s office for an annual physical exam. They check your temperature, blood pressure, height, weight, may be draw blood to run some tests, and anything else that they need to, to determine how well you are doing physically. In the world of personal finance, knowing your net worth is very similar to your annual physical exam. Net worth is a very effective way to measure your financial well being.
Do you know your net worth?
What is Net Worth?
In the corporate world, you may have seen this equation a lot:
Shareholder Equity = Assets (what the company owns) – Liabilities (what the company owes)
In the world of personal finance, the equation stays the same – you just replace share holder equity with net worth:
Your Net Worth = Your assets (what you own) – Your Liabilities (what you owe).
This is everything you own – your home, car, stocks, bonds, retirement savings, savings account and checking account balances, any other real estate you own, and of course, the cash you have in your wallet 🙂
This is everything you owe – mortgage balance on your home, credit card balances, car loan balances, unpaid bills, student loans, and tree house loans (just kidding) 🙂 and anything you owe anyone.
Calculating Net Worth
Subtract your total liabilities from your total assets and you get your net worth.
FINRA (Financial Industry Regulation Authority) recommends tracking and updating your net worth on an annual basis. They also provide a simple reference table that shows how you can list down all your assets / liabilities and calculate your net worth.
After you have done the calculations you may have a positive net worth (which is a good thing) or a negative net worth (not a good place to be in).
Regardless, you know exactly where you are from a financial perspective.
Once you know where you are, you can take steps to improve your net worth.
Net Worth – A Measure of Wealth
A person could be earning a six figure salary (~$100,000), driving a leased sports car, renting a fancy apartment / condo, living paycheck to paycheck, and drowning on credit card debt driven by consumerism.
If you calculated this person’s net worth, it would be deep in the “red” given that he / she does not have any tangible assets and only has credit card debt. He / She may look cool on the outside, but have nothing going well for them from a financial perspective.
On the other hand, a person could be earning half as much (~$50,000), owning a modest car, owning a modest home, not living paycheck to paycheck, and be debt free.
If you calculated this person’s net worth, it would be pretty impressive. He / She may look unimpressive on the outside, but have everything going well for them from a financial perspective.
You see, I was a genius, I am being cynical. I was a student on a scholarship, my tuition fully paid for, receiving monthly paycheck as a research assistant. Instead of living within my means, I was leading my life as the person with a six figure salary with a paycheck of research assistant.
And my net worth went down the drain!
There are several sites that show net worth statistics of the US population. Depending on how good or bad your net worth is, you can stroke your ego, or feel depressed when you start comparing yourself to others.
Neither action is going to improve your net worth by a dime.
Instead, the aspiration should be to focus on how to improve your net worth and track your progress towards your goals.
Tracking Net Worth
You can do your net worth calculation on a Excel spreadsheet – I call it the good old fashioned way. As I mentioned before, FINRA recommends that you update and track your net worth once a year.
You can update your net worth as often as you would like to, but I would recommend at least once a year.
If you want to track your net worth without having to do a lot of work manually, you could sign up for a free service like Personal Capital, that helps track all your money, and makes tracking your net worth a piece of cake.
If you look at the personal finance blogging community, most people track their’s on a monthly basis.
I used to track my net worth on an annual basis. After I started blogging, and became part of the PF blogging community, I caved into the habit of tracking and updating my net worth on a monthly basis.
My Net Worth
I first started tracking my net worth way back when I graduated out of college and started working. If you have been reading my blog, you know how I got out of my 27K credit card debt in three years.
Oh well, there you go. I didn’t have any other assets that were significant at that point in time. It is fair to say that I started out with a net worth of -$27,000.
Yes, you read that just right! I started with a negative net worth.
If I did have an asset, it was financed almost fully, and therefore did not have any impact to my net worth.
When I penned down my total debt, I knew my net worth.
Then, I focused on paying off my debt while contributing to my 401k just enough to ensure that I got my full employer’s matching contributions (free money). Both actions started having a positive impact on my net worth.
Over the course of time, I became debt free, and I have improved my net worth a good bit. A lot of PF bloggers share their net worth online. I am not comfortable to share my net worth just yet.
I may choose to at some point in the future.
If you have a negative net worth, then it is a wake up call for you. Take control of your finances. I would suggest you to review the personal finance checklist, build an emergency fund if you don’t have one, and take steps to be pay off your debt.
If you have a positive net worth, that’s great. Then, focus on steps you could be taking to boost your net worth.
Do you track you net worth? If so, how often? What steps are you taking to grow your net worth this year?