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I personally feel like tracking your net worth is the step after creating and following a budget. Budgeting gives you a good monthly picture of your finances, but net worth gives you the big overall picture of your financial health.
What is your net worth?
Your net worth is the difference between all your assets and all your liabilities.
Liabilities are the total of everything that you owe. This can include mortgages, car loans, student loans, credit card debt, and any other loans/bill balances you may have.
Your assets include anything you own. This includes the value of your bank accounts, real estate, investment/retirement accounts, cars, jewelry, and household items. Some people choose to include the value of their home under assets and some do not. It is not included for some peop[le because they do not plan to sell it at any point in time or it is not completely paid off and they do not feel like it should be included as an asset. That’s a personal decision for whoever is calculating their net worth.
Why does it matter?
Knowing your net worth will help give you an overall look at your finances and know where you are when it comes to your overall financial health. This will help you track your liabilities and your assets, so you can create better financial goals.
Having a good financial future is dependent on planning and knowing your net worth is what will best help you plan that future.
Knowing this can be a huge motivation to help you get out of debt. It can help be that thing that keeps you motivated to pay down your debt and stick to your budget.
How to Calculate Your Net Worth
You should try to track your net worth on a monthly basis. I use a spreadsheet on the computer, so I can also have a graph that correlates, but you can also use a notebook. Whichever you prefer will work just fine.
Net Worth=Assests-Liabilities
You will need to create a list of ALL your assets and add up the cash equivalent. (Cash equivalent meaning the value of an asset, so whatever you could sell your car for today is the cash equivalent)
These can include bank account balances, investment account balances, CDs, bonds, retirement accounts, the value of jewelry, value of household items, business assets, and the value of your cars and home.
Next, create a list of all your liabilities and add up the cash equivalent. This can include all debts/loans (car, student, personal and credit cards), medical debt, mortgages, home equity loans, and cash you owe to others.
Once you have the two totals, you will subtract your liabilities from your assets. This can be a negative number. If you have a negative net worth, that means you owe more than you own.
If you track this monthly, you will see your net worth either go up or down. When net worth is going down, you need to take a good look at your budget and make a change quickly.
If it’s going up then you’re taking good steps towards a better financial future.
Ways to Increase Your Net Worth
Get Out of Debt
If you have debt, pay it down as fast as possible. Paying interest on loans is literally like throwing money down the drain. We have two mortgages and are doing everything possible to pay them down quickly. Always make sure your total debt is less than the month before. Even if it’s only a little bit, that’s much better than taking on more debt.
Stick to a Strict Budget
You can’t be spending more than you make if you want to increase your net worth. You need to start tracking expenses and make sure that you are spending LESS than what you make and living below your means.
Get a Side Job
Getting a side job with consume more of your time, but that means you will have less time to spend money! You will also earn extra money which in turn will help increase net worth, as long as you aren’t spending it on unnecessary things. A side hustle can be anything from getting an actual part-time job to using reward apps to save and earn extra money.
Get Rid of or Reduce Expenses
I have a post about 25 things we no longer purchase to save money. We’ve cut out a lot of unnecessary expenses over the last few years. This has saved us a lot of money.
We’ve also reduced a lot of our expenses by negotiating insurance rates and downsizing houses to lower mortgage payments. We also walk/bike to work and have saved hundreds of dollars on gas. There are a lot of ways yo reduce expenses, you just need to be creative.
Conclusion
Tracking your net worth on a monthly basis is a huge motivator for me. Each month you can see it increase and continue doing what you are doing. If you see your net worth decrease, you can adjust your budget and financial plan accordingly to do better next month.
Do you track your net worth? If not, why not try it this month and see how it goes?