So many people out there want to improve the state of their finances. In fact, for many it is a New Years resolution every year. Today I’d like to discuss one of the most important things you need to do when you are trying to improve your financial situation, and that is calculate your net worth.
Net Worth Broken Down
For those who may not know, net worth is the sum of all of your assets minus the sum of all of your liabilities, or debts. Here’s an equation for the visually-minded folk out there:
Value of assets- Value of liabilities (debts) = Net Worth
What are assets? Basically an asset is anything that has value that you own and could access to live off, receive income from, sell, or trade now or in the future. Examples of assets are your home, rental properties, retirement accounts, savings/money market accounts, etc. Assets have the ability to put money in your pocket.
Liabilities, on the other hand, take money out of your pocket. Liabilities are usually debts, put simply. Examples of liabilities include mortgages, student loans, credit card debt, car loans, personal loans, etc.
Why You Need to Know
Think of your net worth as a measuring stick to determine how well you are doing. This is a number you simply need to know- otherwise how are you ever going to be able to tell if you are getting anywhere on your financial journey? Most of us don’t keep our money in cash piled up in the spare bedroom in our home- it’s not like we can physically see a pile of money growing to tell us that we are getting wealthier.
No, we get wealthier by paying down debts and piling up more money in our emergency fund, retirement accounts, etc- but you can’t see these things happening. Sure, you can log in to your online bank account to see the amount of money that’s hopefully growing in there- but this is only one small piece of your financial picture, and you really can’t determine what that one piece alone means without looking at the rest of the picture as well.
Trying to navigate your financial journey without knowing your net worth is like trying to lose weight without knowing how much you weigh. How are you going to know if you are making any progress if you never step on the scale? How are you ever going to motivate yourself to do better if you never “weigh in”? Even worse, what if something about your finances (or eating habits) is causing you to move backwards and get farther away from your goals? If it’s a goal that you’re serious about achieving, you simply have to know how you are doing, right?
How Often to Review Net Worth
Different people choose to calculate their net worth at different intervals. In the CMF household we calculate our net worth quarterly on January 1, April 1, July 1, and October 1. We like doing it quarterly because we think it’s easier to see the changes over a longer period of time than monthly. Also we have a lot of accounts because of our rental properties, etc, and it’s a lot of numbers to run down so it’s easier for us to do it quarterly. But some folks do it monthly, annually, or semi-annually.
I personally would recommend calculating your net worth at least once every six months, but you will have to determine what’s best for your particular situation. The point is this: make sure that once you start doing it, you do it regularly! Otherwise you are trying to lose weight without stepping on a scale.
What if the Numbers Are Ugly?
Early in your journey when you first calculate your net worth, you may find that the number is negative. That was the case for us until April 2011 when we finally “made it into the black.” During the months when we were calculating our net worth and it was negative, I have to tell you that fact alone was extremely motivating! We turned those numbers red on the Excel spreadsheet that we use, and we wanted so badly for our net worth to be out of the red!
The day that the numbers turned black was a pretty exciting one for us, and we’ve never looked back since! Every quarterly net worth since then has been in the black, and it has increased nearly every quarter since then. Woohoo!!!
But I wouldn’t be able to share this awesome fact on my blog if Mr. CMF and I hadn’t been running the numbers regularly. We also wouldn’t be able to make plans for paying off our debt, saving for our goals, etc. In short, we would not very easily be able to take steps to improve our financial future, since we would have very little idea of what our present looks like. I encourage everyone reading this to calculate your net worth and take steps to improve your financial future.
Free Online Net Worth Tracking Resource
The internet has made it easier than ever to keep tabs on your net worth. If you don’t want the hassle of tracking down all your numbers and creating your own spreadsheet, the best FREE online resource that I know of to help you monitor your net worth is Personal Capital (review here). Even though we’ve long kept our own net worth spreadsheet, I also have an account with Personal Capital. It’s a terrific resource to help see where your money is going and establish a better budget, as well as better plan your retirement savings strategy. And it’s FREE- doesn’t get much better than that!
If you already calculate your net worth regularly, how often do you do it? Did you celebrate when you crossed the line from red to black? If you’ve not yet made it into the black, do you know how long it will take you to get there?
P.S. If you liked this post, you might enjoy using our free Net Worth Calculation Template. Sign up now to receive each new post delivered to your inbox, and we will email you the template! Sign up here.
Note: This post contains affiliate links.
DC @ Young Adult Money says
I do not run the numbers regularly because I’m really not focused on my net worth at this time. I do track all of our spending and make sure it’s in line month-over-month and make adjustments as needed, but I’m really focused on increasing income. Also, I would likely still be in the red due to student loans. There’s no good reason to NOT calculate net worth, but I think that’s why I’ve been putting it off 😉
That’s cool- but you might find that if you ran the numbers it could be extremely motivating if it’s negative- at least it was for us 🙂
I don’t really calculate my net worth but I do enjoy watching account balances grow. It really is fun to see the progress we’re making!
I know, it’s neat to watch the progress over time- there are plenty of days when it seems like we’re drowning in student loan debt and unexpected expenses. It’s helpful to be able to look at our net worth statement and know that we are making progress over time, even if it doesn’t always FEEL like we are making progress.
Michelle @fitisthenewpoor says
Because we have a history of forgetting about or minimizing our debts, we are calculating it monthly (we’ll post ours on Friday). It just helps to see it all laid out and it puts everything in perspective as we work to grow our assets and diminish debts.
I totally agree. It’s helpful to be able to see all the numbers in one place and be able to gauge progress. And it makes us feel a little better about our debt to know that, even though there is a lot of it, it’s IS going down over time, which feels great.
Lauren May says
We use Mint.com for budgeting and tracking our accounts, so it tracks our net worth for us. I love that we can log in at any time and see exactly where the numbers stand.
That’s great! I have never used Mint.com but I know a lot of people who do- wow, that makes it really easy if it does the calculation automatically!
Shannon @ Financially Blonde says
I don’t necessary track net worth frequently because investment balances will naturally fluctuate throughout the year, and I never want to feel “panicked” by my investments. I do monitor my cash flow and the growth of my cash before it gets sent to the investment bucket on a regular basis. I agree, though, whatever your measurement stick is, you should know what it is and make sure you are checking in with some regularity.
Well said- although even if markets are doing poorly we still calculate, since hopefully our debts will be continuing to go down as long as we are making regular payments. That in turn helps net worth go up. So even though the markets fluctuate it really hasn’t bugged us because we still get to see the numbers heading at least somewhat in the right direction most quarters.
Oh no Dee!!! I am terrified to do this. You have convinced me that I must…but I am going to put it off till my next budgeting time. I am going to be so in the negative. Thankfully I own my car but besides that I don’t have anything to go up against my student loan debt. ='(
Hey, that’s ok! Most people start in the negative. But it’s really motivating, I think, AND it’s really cool to look back later and see how much progress you’ve made and how far you’ve come!!
I don’t calculate my net worth myself, I let Mint.com do it. I check every few months, but I have a pretty decent idea how I’m doing. I actually use the amount of cash in my checking account as a measuring stick. I let it build up and then invest it all at once. The faster it fills up, the better I’m doing!
With most of our money in investments, a dip or rise in the stock market can have a big impact on that final number, but it doesn’t necessarily mean I’m doing something right or wrong. It’s definitely more useful of a number when looking at it over a longer period of time.
That’s true- it is most useful when viewed over time so you can see how far you’ve come.
Laurie @thefrugalfarmer says
Great post, Dee. We calculate our net worth quarterly at the very least. One thing we’ve found about keeping track of our net worth is that it encourages us to keep on with our debt payoff plan. Instead of just watching our debt numbers go down, we like to watch our net worth number go up. This gives us extra drive to keep pushing through the rough months.
Exactly! We feel the same way. Even when our net worth was negative it was incredibly motivating to see the debt amount going down and the net worth going up every quarter. There have been some quarters that things have been ho-hum (or worse) in the investments department, but because we have still been paying down debt we still get to see our net worth going up. It’s pretty cool!
Brian @ Luke1428 says
We calculate our next worth every 6 months. We are about to celebrate because all liabilities are about to drop out of the equation.
Brian that’s AWESOME! Congrats on reaching that place- that’s a really important milestone!!! I hope you guys are planning to celebrate!! We are looking forward to getting to that place, but unfortunately it’s kind of a long ways away!
Ryan @ Impersonal Finance says
I actually just wrote about my net worth, and it turns out I took a semi-controversial position on including retirement accounts. I run the figures about twice a year, but I keep an almost daily eye on all of my accounts, so I could pretty much estimate it within a couple thousand dollars at any time. But I totally agree, seeing it grow from a negative figure to a positive one is definitely awesome and motivational. I much enjoy being in the black compared to the red!
Hey, being controversial isn’t always bad! I think the motivation factor alone is a big enough reason to do it- it’s a pretty huge motivator to find out you are $100K in the red!!