Financial Fridays: Net Worth – Take Stock Of Your Assets and Debts

You can calculate your net worth with paper and a computer or phone

Welcome to Financial Fridays #2! Over the next 6 weeks – every Friday from now until the end of 2017 – I’m going to share posts that will help you paint a picture of your financial life today and set you up for a prosperous 2018. We’ll touch on topics ranging from income and expenses to net worth, debt, career advice, and setting goals.

These are some of the steps Kristin and I have taken to help set ourselves up to be able to afford our dream wedding, dream house, and plan for early retirement. Of course, a healthy dose of privilege helps and I’d be remiss to not mention how fortunate we’ve been in that regard.

If you’re looking to make 2018 a better year financially than 2017, tune in every Friday for the rest of the year!

Why Fridays? Each post will have a set of actionable items that could be achieved easily over the course of a weekend!

Did you miss last week’s post? If so, give it a read.

Financial Fridays 2: Net Worth

Last week we talked about the importance of tracking your income and expenses. These are the fundamental variables that you can change to end up in a better financial position. The gap between income and expenses is what you can choose to save or invest, or blow on something else.

This ultimately corresponds to growing your net worth. Net worth is a super useful number. I use it as one of the many metrics I focus on – but it’s not the end-all-be-all.

What Exactly Is Net Worth?

The easiest way to describe net worth is a simple formula:

Net Worth = What You Own – What You Owe

When first assessing your net worth, it’s super common for folks to ask what to include in the “what you own” part of it. I own my clothes, for example, or my car – should I include those?

I don’t. We could sell our clothes but tracking them isn’t a worthwhile endeavor for me. I’m not going to sell my clothes, and they’re not producing any money for me. Therefore, I don’t include it. The same goes for our one car and even our house – kind of.

I calculate two different versions of our net worth. One that includes our home equity, and one that does not. The reason?

It’d be strange for me to have a multi-hundred-thousand-dollar liability without a corresponding asset, when we could sell our house if we really wanted to.

But I don’t like to include it in one version because we’re not planning on selling our home when we retire. The equity in our home isn’t going to be used to fund retirement, and I want to use net worth to paint a picture of how close we are to hitting “our number”.

Ultimately what you decide to include (car vs no car is the most popular debate) is fine. However, take care to ensure you’re valuing things accurately and consistently each time you calculate your net worth.

Action: Write down a list of everything you own and of everything you owe.

Why Track Net Worth?

Net worth is a great benchmark that’s easy to track over time. If you link your accounts to a service like Mint or Personal Capital, they do all the heavy lifting for you. All you need to do is log in periodically and see how you’re trending.

But here’s the thing: net worth can be heavily skewed by things you have no control over. Market decides to take a dive? Your net worth – if you’re invested in stocks – will follow. That’s okay so long as your time horizon is sufficiently long and you can stomach a bit of a dip.

I find that focusing on systems over performance is helpful. Set up automatic 401(k) withdrawals – and then push yourself to increase them over time. Making sure you’re invested in something that matches your risk tolerance is important. You can spend hours researching various investments and never start. Perfect is the enemy of good.

Tracking net worth holds you accountable to putting systems in place and then sticking with them over time.

Action: Set up systems to track your net worth over time. My preference is Personal Capital, but a spreadsheet works too.

What To Do With This Information

Knowing your financial worth is great and all, but what’s the point of it? What should you do once you know this little nugget of information?

We use ours to track our progress toward our ultimate goal of “retirement”. I don’t anticipate Kristin and I will totally stop earning money at basically any time in our lives. Consulting is something I’d really like to do – but we still use net worth as a benchmark for our “freedom number”.

Once we hit that? We’ll have options. The ability to choose to work if we want…or to do nothing. Taking a job irrespective of what it pays, if it pays, is why we aim to increase our net worth.

If you don’t know what your number is, that’s okay. Lots of folks don’t, and even ours changes over time. Some of it is lifestyle inflation, some of it is finding ways to cut costs. It’ll fluctuate and our vision of what our lives will be like after we’re done working corporate jobs will fluctuate as well.

In order to track how we’re progressing, we set intermediate goals along the way. This can be a daunting process, but it’s one I’ll dive into in quite a bit of detail in the coming weeks.

For now, get yourself set up with Personal Capital (you can check out my review here) so you’ve got a baseline to work with. Even if it’s low – or negative – knowing it will help you on your journey.

After all, ignorance isn’t bliss. Your net worth exists regardless of if you know it or not. Better to go through your life with eyes open.

Question:

Do you actively track your net worth? How often do you check?

Bonus Question:

What should I add to this Financial Friday post to help round it out? Any recommendations on future posts, or things I could expand on, omit, etc.? Do you like the format? I’m looking for feedback!

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8 Comments

  1. I check my net worth and use Personal Capital to do so. I think it is a great tool and would recommend it to anyone for personal finance. The only bad thing about it is that it doesn’t have a budgeting tool.

    1. Yeah, I’d expect at some point they may introduce one; but it’s still good to retroactively look at expenses as a whole, etc.

      I find that Mint probably does a better job on the pure budgeting side. But we don’t really use it at all anymore.

  2. Good idea. It’s very important to keep track of the net worth, so you know where you are, and decide for the next step: how to increase assets, and how to decrease debts. Debt is something that needs to be tackled. If you don’t control it, it’s coming back to control your life.

    1. Absolutely! I’ve always been a big proponent of controlling costs before focusing on anything else – like increasing income. After all, if you keep getting yourself into debt, it’s likely that more money won’t solve that…if anything the debt numbers may just increase!

  3. I agree with you on controlling costs first. In any given moment, most people can still find ways to cut.

    We use basic spreadsheets and portfolio tools from our bank and brokerage accounts to track our net worth. Mr. Groovy pulled back and was checking only once a month. But now that we’re coming up on our first full calendar year of retirement, he’s checking more frequently.

    Interesting series. I don’t know you or your audience well enough to make any recommendations. But given that you mentioned Paula Pant, she did that talk at FinCon (I listened to it on her podcast) about writing for yourself and not your audience. I think there’s some validity to that. Just a thought.

    1. Oh nice, I love Paula – she always has something insightful to say!

      I imagine I’d be checking both net worth and our budget much more diligently as we near retirement and then shortly thereafter to just see how things go, make sure we’re ready, etc. I’m an over-planner for sure though – sounds like Mr G might be, too 🙂

  4. Hey there Dave! I look forward to following this series. I’m especially interested in how you’re treating Net Worth. I personally choose to look past NW and focus on cash flow, since the liquidity part of the equation will be what matters most in early retirement. NW is fun to use as a yardstick for how much wealth you’ve accumulated but has little other utility. We do include our home equity – since net worth is net worth. But if you choose not to include it, you’re sort of reverse engineering your way back to a liquid NW, and you might as well then ignore it altogether? Just my random two cents half way into my first cup of coffee. 🙂 Cheers!

    1. Yeah cash flow is a big thing – if you can hit your cash flow targets but aren’t where you need to be on NW that’s fine…just all depends on what your strategy is to fund your retirement. If it’s through the sale of assets then net worth is a great benchmark, and you just look at those assets you can sell. Definitely a good call out on the liquidity being key.

      We focus on a liquid NW which is why we don’t use the house. I generally don’t include it except to offset the mortgage and make me feel less bad about it haha 🙂

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