When it comes to gauging your wealth, the best indicator is your net worth. Imagine if your budget is your arrow, then your net worth is your moving target. Your budget is particular to your day to day life. You can track your net worth to see where you stand over time for all of your accounts.
What is Net Worth?
Whenever you hear about celebrities’ wealth in the news, the reports usually are about their net worth. For example, businessman and rapper, Shawn Carter, recently reached billionaire status. Forbes took his debt, taxes, and expenses into account and decreased the estimated value of his assets to be more conservative. The fact that Forbes didn’t just take the asset at face value is an important distinction that applies to everyone. No matter how much income you earn or how many assets you have, if you have just as much debt or as many expenses, you aren’t building wealth.
Forbes used a fancy algorithm to calculate Mr. Carter’s net worth. However, when you have all the details, the formula is straightforward. Find the sum of your assets and debts, then subtract the two. The remaining value is your net worth. This value can be positive or negative, but the goal is to have a positive net worth that is steadily increasing.
Ways to Track Your Net Worth
I track my net worth several different ways. I prefer pen and paper, but I also have used several applications. I like Personal Capital and Savvi Financial. They are very similar in that you have to link your accounts, so they update automatically. Personal Capital focuses more on asset management and investing. They will even schedule a free financial advisor session with you. Savvi stands out more to me because it also factors in your benefits and tax implications through retirement. You can also set goals and make a plan in the app. Either site will track your net worth for you and signing up is easy. Every time you sign in after, your most recent net worth will be available immediately with no calculations on your part.
How Your Net Worth Changes
Once you start tracking your net worth, you’ll notice these changes as you pay off debt, save, invest, and increase your income over time. Sometimes you have no control over the difference in your net worth. If you own a home, a change in the value of your home will affect your net worth.
The Federal Reserve Bulletin from September 2017 reported the data of the Survey of Consumer Finances. It says the median net worth of all families was $97,300 in 2016. The median represents an increase of $13,600 from the three years prior. During this time, the asset values increased, debt values decreased, or both. This change could be attributed to home values increasing again after the last real estate bubble burst.
The Importance of Tracking Your Net Worth
Knowing your net worth helps you make smart decisions and create attainable financial goals. Since the value comprises both assets and debt, it makes you aware of your wealth-builders and your wealth-killers. With this new information, you can set goals to maximize your net worth and improve your life. For every dollar in debt you pay off, you increase your net worth by that same dollar. However, every time you transfer funds from your savings account or take a loan against your 401k, you are decreasing your net worth.
When making financial decisions that will affect your net worth, you should think long term. The wealth you build now can be passed on to future generations and help you gain financial independence.