Measuring Your Net Worth
When it comes to saving and improving your financial outlook, few numbers are more important than your net worth. In fact, many financial experts consider this to be the single most important measurement of wealth. That is why learning and routinely assessing your net worth is so important, especially when your goal is to improve your overall financial situation.
Luckily, unlike many other financial measurements, calculating net worth is simple arithmetic:
Net Worth = Assets – Liabilities
Therefore, if your assets equal, say, $350,000 and your liabilities equal $180,000, your net worth is $170,000. However, understanding the formula is just the first step to maximizing this important financial tool and using it to increase your wealth and achieve financial freedom.
Why Net Worth Matters So Much
When it comes to assessing your financial fitness, few numbers or formulas are more useful than net worth. Why? Because this number tells you, at a glance, how well you are doing when it comes to meeting overall financial goals. Furthermore, by tracking this number over time, you can accurately measure when you are doing well and when you are doing poorly financially.
In addition, routine assessments of your net worth reveal a number of key facts about your spending and saving habits as well as your overall financial fitness. Let’s take a look at some of the key financial conclusions you can draw based on this simple number:
1. Financial Progress Over Time
Comparing this figure month-to-month or year-to-year is the best way to track financial progress and identify problems. When the number goes up, you know you are making healthy financial decisions. When the number goes down, you know you need to step back and reassess. By using this one, simple figure to track your financial progress over time, you can easily identify problem areas (such as a tendency to over-spend during the holiday season) as well as identify whether or not changes to your spending (such as a new grocery budget) are having a worthwhile effect.
2. Real Value of Income
When it comes to financial fitness, the easy thing to do is group people according to how much they make. Unfortunately, a six-figure income does very little for those with six-figure expenses. A growing income is only useful inasmuch as it contributes to overall financial growth. If a change in job leads to higher expenses, greater taxes, or increased debt, you are not actually improving financially, and this is important to realize.
3. Real Impact of Debt
Living debt-free is an admirable goal, but it is not always a feasible one. Many people must take on debt to buy a home or pay for college, for example. While taking on such a liability is no doubt frightening, if you have sufficient assets to support it, the consequences are far less extreme. A $25,000 college loan is less of a burden if you have $200,000 in other assets and no other debts. Knowing this makes your decision easier.
4. Real Measure of Assets
People love to brag about how much they have. The value of a home, asset portfolio, vehicle, and all other holdings is a point of pride – and a physical indication of wealth – for many people. However, having $300,000 in assets doesn’t mean much if it is attached to $299,000 in debt. Just as debt, once put in perspective, can be okay, assets need to be seen in the same way. No one figure matters as much as the difference between the two.
Calculating Your Net Worth
While the formula is simple enough and the benefits of knowing the figure quite obvious, calculating net worth can be time consuming. To get an accurate picture of your financial fitness, you need to locate and tally all your assets and all your debts thoroughly and do so on a regular basis. Here’s a quick list to get you started:
| Assets | Liabilities |
|---|---|
Liquid Assets
Retirement Investments Non-Retirement Investments Real Estate (use market value) Personal Assets (only major items)
Cash Value of Life Insurance Policies |
Mortgages Installment Loans Student Loans Credit Cards Business Loans Personal Loans |
The first time you calculate net worth is always the most complicated because it involves finding these numbers and generating your lists. Once completed, however, you can use the same list (with updated figures) to keep a running calculation. Once per quarter is a good rule if you want to get a steady picture of your wealth without dedicating too much time to the task.
Improve Your Net Worth for Financial Freedom
The real value of understanding and calculating your net worth isn’t in knowing the number at any given time, clearly, but tracking it over time. And it is because of this that the net worth figure serves as such an important part of your financial fitness, and why it is the key number to know when trying to achieve financial freedom.
A high figure that continues to rise means that you are meeting your financial goals. A low, stagnant, or dropping number indicates the opposite. In the later case, knowing net worth becomes even more important because it can lead to a tough reassessment. There are only two ways to make that number go up:
1. Make more money
2. Spend less
And while we all wax poetic about doing more of both, knowledge of your net worth is a clear wake-up call to get to it. As a part of a systematic budget, long term plan, and conscious approach to finance, net worth very much is the key to unlocking your financial freedom once and for all.
