Net Worth Tracking: The Underutilized Financial Tool
/When it comes to tracking finances, budgeting is likely what you think of, and rightly so. Budgeting continues to be the best method for establishing your monthly income and expenses to ensure you are on track. What I am suggesting is not a replacement for budgeting but a complement to it. Tracking your net worth allows you to see progress across your financial picture over the long term. Let’s dive into this underutilized tracking method that can significantly impact your financial outlook.
How to Figure Out Your Net Worth
The first step in calculating your net worth is understanding the necessary information. You can think of net worth as a mathematical equation. The equation goes: Assets - Liabilities = Net Worth. To break it down even further, I will often explain net worth as the difference between what you own and what you owe. What you own (assets) would consist of your home, vehicles, investments, money in the bank, and other tangible goods. What you owe (liabilities) would be any home loan, auto loan, student loan, or other consumer debt.
There is no shortage of methods for tracking net worth, so the best method will ultimately be what works for you. There are plenty of Net Worth Calculators on the internet, but I like to use the Schwab Net Worth Calculator. Others may prefer to create their own spreadsheet. Both methods are great ways to calculate and track your net worth.
How Often to Track
Once you know what comprises the net worth statement, you need to figure out how often you will track it. This is a preferential component, but the most effective frequency is calculating and recording your net worth every year. Because of fluctuations in cash flow and investment performance, tracking on a monthly or quarterly basis would not have much benefit. Doing this yearly makes the most sense because enough time has passed to see legitimate progress. Many people do an end-of-year financial review, and adding this into that process can be simple.
The other reason I like the year mark for calculation is that net worth is intended to complement your budget. Your monthly budget ultimately leads to the progress you see in your net worth statement. It takes the monthly victory of following your budget and shows you a more substantial victory by compounding those smaller wins over the course of a year.
The Benefits of Tracking
All this information is excellent, but why do it? Where does the benefit actually come into play with tracking net worth? The main advantage lies in the bird' s-eye view of your financial well-being. It provides you with context on financial components that your monthly budget doesn’t take into account. Seeing overall liabilities go down and, in turn, watching your asset total rise over the years can be an excellent encouragement to stay the course.
The final benefit of net worth tracking is its opportunity to measure success based on your progress instead of basing it on others. No two people have the same financial picture, so why compare to someone in an entirely different circumstance? Often, we can't help ourselves from it. But by tracking your net worth year after year, success is measured by your improvement from the last year and not by how your number stacks up to those around you.
The “Secret” to Growing Your Net Worth
The final question that often accompanies conversations about net worth is how to improve your number. Honestly, it’s pretty simple, and the answer isn’t anything groundbreaking—consistent effort. By being consistent over time, you allow compounding growth to occur. Not just when it comes to your money compounding but also the good habits associated with money management. Much of this comes back to the foundational principles I discuss in my article, “Mastering Your Money: Budgeting Essentials and When You Need Them.” The “secret” to improving your net worth is consistent effort over a long enough period.
Final Thoughts
Net Worth tracking doesn’t have to be very time-consuming, especially if it is done only once a year. Taking an extra 30 minutes at the end of each year to calculate your net worth may quickly become your favorite way of tracking financial progress. Remember, this is not intended to replace your monthly budget. If done properly, your net worth statement will be an amplified version of your monthly efforts and diligence.
References
https://www.schwabmoneywise.com/net-worth-calculator
Fiduciary Financial Advisors, LLC is a registered investment adviser and does not give legal or tax advice. The information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. The information contained herein has been obtained from a third-party source which is believed to be reliable but is subject to correction for error. Investments involve risk and are not guaranteed. Past performance is not a guarantee or representation of future results.