There are only three directions your financial life can head: Forward, backward, or stalled out. Which direction are you heading? There are probably a lot of ways you could answer that question. If you are keeping a budget you are probably moving forward, if you just put $500 on a credit card you are probably going backward, but those are just small pieces of your financial puzzle. There is only one way to gauge where you are in your financial life and it’s by determining your net worth. This week in my Indy Star column, I discussed the ins and outs of net worth monitoring.
“Net worth is a metric that allows you to track momentum, measure efficiency, recognize debt repayment, and account for saving and investment deposits. . To calculate your net worth, simply add up all of your assets. This list should include real estate, savings, and investments. Next, add up your liabilities (debts). You can include your mortgage, credit cards, student loans, medical debts, and any other other type of debt on this list. Be sure not to forget personal loans. Now, subtract your total liabilities from your total assets. The difference will be your net worth.” (courtesy of the Indy Star)
Momentum can not be solely measured by budgeting or by the balance in your checking account. There are too many variables for just one element to give you a clear picture of where you are. That is the beauty of net worth calculation. This equation takes all of your complex financial information and spits out one simple number. It is the only number you need to measure your progress.
There is a chance your net worth will be negative. That’s okay, don’t freak out. Knowing where you are in your financial life is the first step toward making changes. Set a goal and then recalculate your net worth in a few months. You’ll be amazed at your progress. Have you ever felt excited to pay your mortgage? Probably not, but now that you are measuring your net worth, every mortgage payment is cause for celebration.
“Monitoring the change in your net worth will allow you to keep tabs on momentum and efficiency. Tracking is brutally important because of the different ways that your net worth can change. Making a mortgage payment increases your net worth. Paying any type of debt increases your net worth. Saving money increases your net worth. Putting money into your retirement plan increases your net worth. Your employer’s match of your retirement contribution increases your net worth. And achieving a positive rate of return on your investments increases your net worth.” (courtesy of the Indy Star)
The only caution? Don’t check your net worth every month. There won’t be enough change to encourage you. If you are working with a negative net worth start off by checking it every six months. Once you reach a positive net worth set an annual net worth goal, say 25% of your income. You’ll be amazed at how quickly you can increase your net worth.
Peter Dunn a.k.a. Pete the Planner® is an award-winning financial mind and a former comedian. He’s a USA TODAY columnist, author of ten books, and is the host of the popular radio show and podcast, The Pete the Planner Show. Pete is considered one of the foremost experts on financial wellness in the world, but he’s just as likely to talk your ear off about bass fishing.