So, you’re starting to make better financial decisions.  Maybe you are following a budget, saving more, or working on paying down debt.  How do you stay motivated?  How do you know what difference it makes in your overall financial wellbeing?  It’s simple – track your net worth!

In my MBA program, one of the sayings drilled into me is that you can’t manage what you don’t measure and that you only improve what you measure.  This is true in business as well as in your personal finances.  Using a budgeting system is essential to financial wellbeing.  However, there is another financial number – the MOST important financial number – that is often overlooked.  The number one, most important financial number to track is your net worth.

What is “net worth?”

Net Worth Formula

Your net worth is, simply put, the sum of everything you own minus everything you owe.  To calculate your net worth, first, you must add the balances of all accounts (cash, checking, savings, CD, investments, retirement, etc.) plus all assets (house, car, etc.).  This gives you the value of everything you own.

Side note:  What assets should be included in the net worth calculation?  For example, should I include my expensive camera, a wedding ring, or my beanie baby collection?  The rule of thumb is to only include items that are relatively easy to sell in a short period of time, that you are willing to sell, and that have an easily identifiable resale value.

The next step is to add up all debts (credit cards, car loans, student loans, mortgage, the personal loan from your uncle Bill, etc.) to arrive at the total value of everything you owe.  Finally, take the total value of what you own and subtract the total value of what you owe to arrive at your net worth.

Man Dont Panic

The younger you are, and the more debt you have, the more likely you are to have a negative net worth.  If this is you – don’t panic!!  This is simply your starting point.  The current value of your net worth is much less important than the change in your net worth over time.  Is your net worth growing or shrinking each month?  Is it steadily growing each year or does it grow and shrink sporadically?

Why is my net worth the most important financial number?

Your net worth is the most important financial number because it gives you a birds-eye view of your finances.  Your net worth is also affected by every financial decision you make.  If you pay down your debt, you are decreasing the amount you owe and thus your net worth will go up.  If you save more money for retirement, the amount you own will go up, which also increases your net worth.

When I was paying down credit card debt, it was sometimes discouraging because it was hard to see the impact that paying down debt had on my overall financial picture.  Sometimes, I would have preferred putting $100 extra in savings so I could see my account balances rise.  I was putting every penny I had to pay off my credit cards so I went a few years with fairly small balances in my checking and savings accounts (just enough for a small emergency fund).  It was frustrating to work so hard on my finances and feel like I never had any more money.  I was judging my financial wellbeing based on the money in my checking and savings account instead of based on my overall financial picture.

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When looking at your finances from a net worth standpoint, you see your net worth rise when you save more as well as when you pay off debt.  Consider the following scenario:

  • Current Net Worth:  -$35,246
  • Monthly Savings:  $300
  • Student Loan Payment:  $450
  • Retirement Contribution:  $400
  • Mortgage Payment (Principal portion only):  $350
  • New Net Worth:  -$33,746

In this scenario, the person may only be putting $300 in a savings account.  However, the net worth will increase with each of the actions.  The total impact of each of these is an increase in the net worth by $1,500.

How to track your net worth

I recommend tracking your net worth at least quarterly, but I think monthly is better.  Each month you will see the impact of your financial decisions.  You’ll be better able to spot trends, stay more motivated as you see positive changes, and be able to quickly identify sources of concern if your net worth begins to dip.

Your net worth will fluctuate somewhat depending on bill cycles, large irregular expenditures (for example, semi-annual or annual insurance premium or property taxes), and fluctuations in asset values and investments.  However, over time you will see the overall trend.

I use a simple spreadsheet to track my net worth, and I update it at the end of each month as I finalize the budget for the next month.  The first column lists all my accounts, assets and debts.  Then there is one column for each month where I enter the current value for each item.  A simple example spreadsheet is shown below.

Net Worth Example Spreadsheet

I also use the app/website Personal Capital and love it.  It makes real-time tracking much easier!  However, I keep my spreadsheet around because I update it at the same time every month – and because I’m a nerd and love spreadsheets.

Additional Details

In addition to tracking my overall net worth, I like to track a few other numbers.  I think of them as subsets of my net worth.  Descriptions of these numbers are below.  If you are a nerd like me, you may find these numbers interesting.

  1. Cash Balance.  This is my cash, checking and savings total.
  2. Net Cash.  This the sum of cash, checking, and savings minus all credit card debt.
  3. Non-Retirement Net Worth.  This is calculated the same as the regular net worth, except that it excludes any retirement accounts.
  4. Home Profit.  This is the value of my home minus all amounts owed as well as the estimated cost of selling.  I take the current estimated market value minus the mortgage balance and the HELOC balance, then also subtract 9% of the current estimated market value (this represents the estimated cost to sell the house).

You only manage what you track

Your net worth is easily the most important financial number as it reflects the sum of all your financial decisions.  Tracking your net worth provides you with a view of the trend of your overall finances.  Every positive financial step you take will help raise your net worth a little at a time.  Remember, don’t panic if your net worth is negative – even if it is really negative.  The actual value of your net worth matters a lot less than the direction of change in your net worth.  Stick with your positive financial choices and the change in your net worth will reflect your hard work!

Do you use a spreadsheet or software/app/website for tracking?  Have you tracked your net worth before?  Why or why not?  Comment and let me know – especially if you have a great tool you recommend.