Your net worth provides you with a full picture of your financial situation. Here’s how you can track it and use it to meet your goals.
Having a full grasp of our net worth is crucial when setting goals for ourselves. Whether your goal is to buy a house within the next 3 years, start building up your kids’ college fund, or take a big “I turned 30!” vacation, having a full grasp of your financial picture will allow you to meet each of your goals. Knowing our own net worth is not something that’s reserved for the ultra rich. It’s something that’s good for each of us to know.
What Is Net Worth?
Your net worth is the total value of all your assets, after you deduct your liabilities. Assets are things that you can cash in, such as cash accounts, property, and investment accounts. Liabilities include credit card debt, personal loans, car loans, and mortgages, to name a few. If you have a positive net worth, it means your assets outperform or outweigh your liabilities. If it’s a negative net worth, your debt is higher than your assets combined.
How To Calculate Your Net Worth
At its most basic sense, it’s a simple equation:
Assets – Liabilities = Net Worth
Doing it manually, however, will require you to get the balances for all your accounts. It will also require you to routinely update these numbers. This method is great if you love manually tracking expenses, asset growth, or need to take better stock of your cash flow on a routine basis. If you want to opt for a more automatic way of tracking your net worth, we like using Personal Capital, an online tool that tracks and manages your net worth for you.
The simplicity of this tool is that it allows you to safely link your accounts, including checking, savings, credit, loan, and retirement accounts. It removes the work that it would take you to check each of your accounts routinely. Instead, it is updated in real time to show you what your net worth is at any given time. In the same way that we talk about finding a budget that fits your needs and lifestyle, finding the best method to tracking your net worth has to be based on YOUR circumstances. If you have the time and energy to invest into a manual net worth tracker, then that is what works best for you. If you prefer having something more automatic and timely, then an online tool like Personal Capital might make the most sense for you.
Why Should You Care About Net Worth?
Knowing your net worth paints a clearer picture of your financial health, even when compared to an expense tracker or a budget. That’s because your net worth takes into consideration all of your resources and all of your financial commitments or constraints (past, present, and perhaps even future). Having this data over time also allows you to decide if your past money behavior is in line with what you’d like for your future money behavior to look like. Net worth is key to goal-setting because it’s what will tell you if your goal is either too small or not yet achievable. All of these insights can be had through this number!
Let’s use an example:
You’re a recent graduate with about $30,000 in student loans. You were also able to secure a steady job within a few months of graduating, and are going on year two with a current annual salary of $75,500. You started investing this year and have maxed out your 401(k) at $19,500. You’ve been able to build up a cash emergency fund of $10,000. You are renting in a high cost of living area ($2000/ month) and would like to explore purchasing a home in a lower cost of living area. You are paying the minimum on your student loan debt, which has an APR of 5%
Assets: $10,000 cash savings. $19,500 401(k). Total of $29,500
Liabilities: $30,000 student loans
How Can Knowing Net Worth Help? By understanding net worth, we can see that there is a lot of potential to reaching the home ownership goals. The net worth is only $500 into the negative. If the job is stable enough, one option to get a higher net worth is to use some of the cash savings to pay off some of the student loan debt. If the 5% APR is not burdensome and the individual’s credit score is healthy enough, then perhaps the decision is to funnel more cash into a “home deposit” account. Through this example, we can see that net worth is not only helpful to letting us know if a goal is reasonable but also in informing us of a potential timeline.
Personal Capital’s user-friendly net worth dashboard makes it easy to access this kind of information. Through one single log-in, we have access to all of our account balances. And while big goal setting requires time, energy, and planning, taking a peek at our potential as often as we want (through an app!) can certainly spark some even bigger dreams.
Personal Capital Advisors Corporation (“PCAC”) compensates Yo Quiero Dinero Podcast (“Company”) for new leads. (“Company”) is not an investment client of PCAC.