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Why You Must Track Your Net Worth

January 8, 2017

It’s that time of the year.  The holiday season is coming to a close and instead of receiving gifts you’re now receiving credit card bills as a result of your recent generosity.  With those increased bills come increased thoughts on your finances.  If you’re like most people you’ve probably set a few resolutions for 2017 as well.  In addition to the typical resolutions, such as losing 10 lbs this year, or finally becoming organized, many people will include a financial goal or two.  These could range from trying to spend less money on eating out to trying to get a better paying job this year.  If your goal is to increase your savings then one of the first things you should do is calculate your net worth.  This should be right up there with creating a detailed budget. 

 

I cannot stress how crucial it is to track your net worth if you’re looking to accumulate wealth over time.  A sprinter wouldn’t set a goal of lowering his time in a race without first knowing what his current race time is.  Likewise a person wouldn’t set a goal of losing 10 lbs without stepping on the scale to weigh themselves first right?  Well the same should go for tracking your assets and liabilities.  The first time you measure your net worth it becomes a starting point.  Once you have your starting point it will give you something to refer back to and measure up against.

What is Net Worth?

 

So what is net worth?  It’s a person’s assets minus their liabilities.  Net worth is a monetary value that a person could realistically get if they were to sell everything they had and pay off their debts, including cashing in investments and selling real estate.  In reality most people won’t calculate the value of every little thing that they own.  Instead they’ll focus on the larger items such as their house, car, bank accounts (including retirement accounts), and any investments they have.  How you determine the value of non-liquid assets, such as a house or car, isn’t a huge deal as long as you’re applying the same method consistently.  House values are often estimated using Zillow. 

 

Every person has a net worth whether they have calculated it or not.  From the uber-wealthy celebrities with an ultra-high net worth to the full time student with a negative net worth.  Below is an example of how a person’s net worth is calculated.

 

 

Sally is a homeowner who has been in the workforce for several years.  In addition to her home she has a car, a 401(k) plan through her employer, and personal savings.  All of these are considered assets.  As for liabilities she has a mortgage, an auto loan, student loans, and also credit card debt.  Once all liabilities are subtracted from the assets you can see Sally has a positive net worth of $38,000.  Looking at this example it should be clear that any unnecessary debt will decrease her net worth.  The silver lining though is that as Sally pays down her debt she will see an increase in her net worth.  This is one reason why I think it’s crucial to track your net worth.  Often times you question whether you should make paying down debt a priority versus saving.  It almost feels as if you’re making a monthly payment and you’ve received nothing from it.  You will be much more satisfied if you start tracking your net worth and begin to see positive gains as a result of paying down debt.  An additional benefit of tracking your net worth is that it is very motivating to see gains relative to a prior calculation.  It will really help you stay focused and forward looking when you don’t think you’re making any progress.

Where Your Net Worth Stands

 

Naturally people are curious about how they compare to others.  Below is a graph I created from Federal Reserve data showing the median family net worth for different age groups in 2013.  Keep in mind that the median value is the center point (not the average).  For example, if there are 101 people in a group then the median age of that group would be the person’s age where 50 people are older than him and 50 people are younger than him.  As you can see from the chart below net worth tends to be smaller for younger families and larger for families with an older head of household.

 

Curious to know what it’d take to get into the top half of all families?  Well according to the Federal Reserve when all age groups are included for 2013 it would take a net worth of about $81,200.  If you calculated your net worth for the first time and don’t like what you see don’t worry.  The main thing is to just figure out a starting point.  It’s hard to know where you’re going if you don’t know where you’re at.  Because of this I recommend tracking your net worth annually and as often as monthly.  Although we don’t mind if you become fixated on your finances, when you start calculating your net worth more than once a month it becomes overkill.  You’ll see fluctuations in your net worth by simply receiving a paycheck or paying a bill.  Personally I track mine quarterly.  This allows for the small swings to get smoothed out over time but it still allows me to see my progress throughout the year. 

 

Today it’s easier than ever to track your net worth.  Several apps will even do it for you once you link your accounts to them.  Mint is my personal favorite and has recently included a bill pay feature to keep track of what bills are outstanding, and offers to pay them automatically via your accounts.  When trying to build your net worth remember that there are many different avenues available and there is no perfect method of doing so.  In a future post, however, I’ll describe some of the quickest ways to increase your net worth.

Did you set any financial goals for the year?  If so, do you think tracking your net worth could help you achieve them or is this something you’ve already been doing consistently?

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