I’ve written a lot on this blog about the importance of calculating your net worth. I think it’s one of the most essential calculations to do if you wish to improve your financial situation. Calculating your net worth at intervals over time is, in my opinion, one of the best ways to monitor your financial progress over time.
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The reason is simple: Because knowledge is power.
Think about it. How are you going to have any earthly idea of how you are doing from a financial standpoint if you don’t run the numbers once in a while? You might have a general idea… or you may have no idea at all.
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
If you are unsure exactly what to count as your assets and your liabilities/debts, I go into much more detail on that in this post.
Whenever I write about the importance of calculating your net worth over time, I inevitably receive comments reflecting the fact that many people are hesitant to calculate their net worth because they are afraid it will be low, or even negative.
I hear you there, I really do. That was the same reason why I hesitated to run our numbers for a long time. In fact, the first two quarters that we calculated our net worth it WAS negative.
But I assume because you are reading a personal finance blog that you want to improve your financial situation, right?
The Power of Knowing
Think of it this way: Forget about money for a second. Pretend that your goal is to lose weight. How are you going to know if you are making any progress on that goal over time? You are going to weigh yourself! I mean, you could just sit around and wait to see if your clothes start feeling any looser, but how precise would that be? The best way to find out if you are making any progress on that goal is to check your weight on a regular basis.
If your goal is to lose weight, you want to KNOW if for whatever reason it’s not happening, right? If you know that the weight’s not coming off, you can change what you are doing. You can make any necessary adjustments based on the information that you gain from weighing yourself. The power of knowing where you stand cannot be overstated.
The same holds true for your finances. If your goal is to improve your financial situation, then you will want to KNOW if for whatever reason you are not making progress. And here’s the cool thing: if you run your numbers on a regular basis, over time it will become obvious to you where the problems may lie- because you are writing it down in some form and can look back and see. By doing this, you will be able to better implement actions to improve your net worth, and even increase your net worth automatically.
The biggest thing that calculating our net worth does for us is it provides MOTIVATION. It is inspiring to see our net worth go up nearly every quarter. Seeing that progress written in black and white really helps it hit home that we are doing something right here. On days when we may be experiencing a case of the “wants,” or on days when it seems like our student loans will never be paid off, knowing where we stand helps keep us motivated to continue on our frugal path.
I admit, it was sobering when we first calculated our net worth back in 2010. We had been out of school since 2006- and we were still in the red (with a negative net worth). But let me tell you, that negative number really lit a fire under us to do better. Seeing the numbers there in black and white (and red!) really made our financial situation real and hit us in a way that I do not think many other things would have. It moved us to change our actions and be better stewards of our money.
On that magical day (six months later) when the numbers finally turned from red to black, we celebrated! Knowing where we stood financially was a huge part of what got us into the black. It really is true that knowledge is power- and I cannot think of many other arenas in which this is truer than in personal finance. The power of knowing where you stand can help you enormously on your journey to achieve your financial goals.
These days 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!
Do you calculate your net worth routinely? If so, how has it changed your financial mindset?
Suggested Reading: One of my fav books that I think really does a nice job of laying out a great framework for your financial life is The Automatic Millionaire. This one is a great read if you are looking to take steps to get organized with your money and improve your financial situation.
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.
CMF’s favorite FREE money management tools!
Some of the best online tools out there for money management are at Personal Capital, and the awesome news is that they are all FREE! Cash flow tracker, 401(k) fee analyzer, investment checkup, net worth monitoring, and many more! I’m a net worth junkie, so the net worth monitor is my favorite. Check out my Personal Capital review here, or click here to check out all the awesome tools for yourself!