We all know the importance of regular checkups with our family doctor, but when it comes to our financial health, we sometimes fail to give it the same attention. While a budget is a helpful way to track your daily spending, tracking your net worth gives you the “big picture” of your finances and is one way of knowing how you're doing.
In a way, tracking your net worth is a lot like an annual checkup with your doctor. Your net worth shows you if your finances are healthy or if you’re living beyond your means. Building your net worth can help you achieve your long-term financial goals, like paying off your mortgage or retiring early. You might want to consider tracking your net worth if your goal is to see it grow.
How do I track my net worth?
Not tracking your net worth is a lot like driving without a map — you may reach your destination, but it could take you a lot longer.
The good news is you don’t have to be a math whiz to track your net worth. Here's the basic formula:
Net Worth = Total Assets - Total Liabilities
Your total assets are what you own. Examples include your home, investments and savings. Your total liabilities are what you owe. Examples include personal debt like your mortgage, line of credit, car loan and student loan.
While there are many tools out there for tracking your net worth, I find the simplest ones work the best. You can search for a net worth statement template online or even build your own.
The importance of goal-setting
Tracking your net worth comes in handy for goal setting. I find the most effective goals are SMART. SMART stands for Specific, Measurable, Attainable, Realistic, and Timely. For example, you could set the goal of achieving a net worth of $1 million at age 45. Once you’ve set your goal, you can figure out how much money to set aside each month to help reach your goal. Goal-setting helps keep you motivated. When you know how much money you should set aside each month, growing your net worth can be less intimidating.
How often should you track your net worth?
When it comes to tracking net worth, I find less is more. Unlike your budget, you don’t need to track it on a monthly basis. Here’s why: your net worth may barely budge from month to month. There’s no hard and fast rule, but I find tracking my net worth every three months is most effective. A lot can happen in a year and I'd rather find out my net worth has hit a bump in the road three months in, instead of a year later.
How do I grow my net worth?
Growing your net worth isn’t rocket science. The easiest way to grow your net worth is to live within your means. That means spending less than you make. The easiest way to achieve this is to pay yourself first. Automate your savings so you’re not tempted to splurge on purchases you can’t afford.
When it comes to your net worth, the trend is your friend. In other words, if your net worth is growing over time, it's a good sign. Similar to the stock market, your net worth isn’t set in stone and will change. You should aim to grow your net worth over time. Since each individual’s financial circumstances are different, there’s no rule of thumb when it comes to net worth. Instead consider setting your own goals and using your net worth statement as a road map for getting there.
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