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Are you tired of the size matter innuendo’s? Me too. I’ll stop soon, I promise. I was told I need to grow up now that I’m a dad, so I’ll try my best to mature in front of your eyes. In this edition of Size Matters, we are going to be talking about net worth. As I mentioned in 5 Things I’m Doing With My Money In My 20’s And You Should Try Too, net worth, in my opinion, is arguably the best indicator of financial health.
Here is how Investopedia defines net worth: “Net worth is the amount by which assets exceed liabilities. Net worth is a concept applicable to individuals and businesses as a key measure of how much an entity is worth. A consistent increase in net worth indicates good financial health; conversely, net worth may be depleted by annual operating losses or a substantial decrease in asset values relative to liabilities.”
This nails it on the head. As assets (cash, investments, house value, etc.) go up faster than liabilities (debts), then your net worth goes up. Your net worth is a snapshot, at specific moment in time, of your financial health. By tracking this number it forces you to interact, on a consistent basis, with your financial life. Your net worth, indirectly, gives you the ability to understand your personal financial habits. For example, if your net worth is decreasing month over month, then you know you are spending more (or getting into more debt) than you make.
Here are three things you should stick to when tracking your net worth:
- Know Your End Goal
Have a specific goal when it comes to tracking your net worth. This can be as simple as getting it from negative to positive, or doubling it by the end of the year. It is important to have a goal so you can get motivated behind trying to reach it. Having a finish line allows you to stay the course when you want to quit.
- Track It Consistently
As I mentioned above, by tracking this your net worth consistently, it forces you to constantly be aware of how you are doing financially. If the number decreases, it will push you to dig through the weeds on why. And completing that exercise is the first step in understanding your finances and getting you on the road to success. While my net worth is tracked daily due to Personal Capital, I compare my net worth each month. This, to me, is the best indicator of how my month went financially. It allows me to understand if I am on track with my goals. While day-to-day decisions affect your net worth, it is still important to think of this number as a longer term goal.
- Don’t Let It Define You
As is common with most things, comparison is the thief of joy. Don’t allow comparison of your net worth to others’ net worth destroy your goals. Understand where you at, where you want to go, and be content with your situation. Set a goal for yourself and be proud of how you reach your own goals, not goals that others are trying to set for you.
You might be asking yourself “How is the best way to track my net worth?” Great question. I use Excel (I update when I do my budget) and Personal Capital to track my net worth. To be honest, I first wanted to promote Personal Capital because they offer a nice commission if you get someone to sign up. But, after trying it out (because I wouldn’t offer something without trying it), it’s actually very slick. The more I use it the more I enjoy going back for updated numbers and tips. It is honestly more convenient and easier than Excel, although I still like Excel for budgeting. Essentially, it’s a Mint.com on steroids, but focused more on investments and less on budgeting.
Basically, you setup your account, and link all your accounts to financial institutions (banks, credit cards, 401(k), mortgage, house estimate from Zillow, etc.). Anything that deals with money, you’ll want to link. From there it will automatically track your net worth over time. Additionally, it will give you cash flow reports, budgeting tips, analyze expense ratios on your accounts, and find ways for you to be more aware of what your money is doing. It is also very easy on the eyes aesthetically. If you want to try Personal Capital for free and see what it is all about, then click the following link: Personal Capital – Join for Free. By clicking the link, you help me out at no additional cost to you.
All that being said, tracking this number is important and if you are serious about improving your financial situation then it’s a must. So, cheers to having more assets than liabilities!