Yes! Your net worth might not be billions of dollars, but that doesn’t mean it’s irrelevant. Looking at your finances from the viewpoint of net worth can help you see the big picture and provide encouragement even if your day-to-day budget seems unimpressive.
Here at Everyday Money, we are all about giving our clients new ways to understand their finances. With more knowledge, it’s easier to plan and manage your saving, spending, and investing. Read on to learn more about how and why to track your net worth.
What is net worth?
The concept of net worth is actually very simple – it’s the value of your assets minus the value of your liabilities. As a basic example, let’s look at net worth in terms of your home. Say you own a home that has a market value of $350,000, and the amount you own on your mortgage is $275,000. In this case, your home contributes $75,000 to your net worth.
It’s vital to understand that net worth doesn’t take your income into account. While your income is undoubtedly a big factor in your overall financial health and stability, it’s not something that counts toward net worth. Your 401(k), however, does count as an asset.
Finding your net worth
So are you ready to figure out your net worth?
- Home/real estate
- Checking account balance
- Savings account balance
- Retirement savings
- Other liquid assets like money market accounts
Next, write down all your liabilities (debts):
- Auto loans
- Mortgages/home equity lines of credit
- Student loans
- Personal loans
- Credit card balances
What if your net worth is negative?
If your calculator returns a negative value, don’t panic. Many people, especially younger individuals, have a negative net worth. It’s not necessarily an indication that your finances are in a bad place. It’s just a number – a starting point. Rather than being discouraged, focus on finding ways to move the needle forward.
Fortunately, every little bit counts when it comes to growing your net worth. Did you make your monthly mortgage payment? You’ve just added to your net worth. And the same thing happens every time you make a payment toward your student loans, credit card debts, and car loan. Contributing to your 401(k), adding to your savings account, making minor improvements to increase your home’s market value – all of these things can grow your net worth.
Track your net worth to see your financial progress
Once you’ve calculated your net worth starting point, you can track it to see how it changes over time. It’s a good idea to go through the numbers every quarter. Seeing your net worth grow after a few months of paying your bills and making responsible purchases can be very exciting.
It’s challenging to calculate net worth without a comprehensive budget. If you don’t have one yet, or if you’ve tried budgeting before and given up, we can help. Check out the Everyday Money Workbook and our BudgetingBlocks™ program. We’ve designed these tools to help individuals and couples effectively allocate their money based on their goals and values. Get started with our collection of free resources.