You have probably heard of the financial term “net worth.” You may be wondering how you can calculate your net worth, and if you actually should track it.
Your net worth is simply your assets minus your liabilities.
Assets include things like:
- Cash
- Home equity
- Retirement accounts and other investments
- Vehicle equity, if you choose to include it in your calculations
- Saving and checking accounts
- Any additional valuables, such as jewelry or antiques
To note, some people don’t include vehicles as assets, since they are a depreciating debt. Liabilities are any debt you have.
Conversely, your liabilities might include items such as the following:
- Student loans
- Mortgage
- Credit card debt
- Personal loans or other debt
Your net worth is essentially a snapshot of your overall financial health. But for millennials, calculating net worth can be somewhat depressing. Most of us graduate college with a negative net worth due to hefty student loan debt. Plus, we seldom have any assets – we haven’t started to heavily save, purchase property, or invest.
However, your net worth can teach you a lot about yourself and your finances. It certainly doesn’t hurt to check your net worth – just be prepared to see a negative number if you have a significant amount of debt.
Don’t get too down about your overall net worth – once you start investing and paying off debt, your net worth will start to increase.
Drawbacks of Tracking Your Net Worth
As we mentioned, for many young adults, checking your net worth can be downright depressing. While it does give you a snapshot of your overall financial situation, it may not be necessary to check it if you know it’s a very negative number.
When I graduated college and finally started to commit to figuring out my financial situation, I calculated my net worth for the first time. Although I had some savings and basic investments, I still had over $30,000 of student loan debt, plus a small car payment. I’ll admit, when I saw just how negative my “number” was, I started to panic a little. To be honest, it doesn’t feel good to know you have a negative financial worth.
Although it was hard to see at first, I’m glad I checked my net worth right away. Now that I’ve been out of school for a few years, my debt is nearly gone and I have begun to increase my investment contributions. It’s pretty motivating just to see how much I’ve increased my net worth over a few short years.
My advice? It’s worth checking your net worth – just be prepared to cringe the first time you see it. But know it gives you a starting point and you can visibly track your progress from there.
And your net worth may not change much when you are just starting to take charge of your financial situation. It takes a lot of time and energy to crawl out of a negative net worth. Overtime, however, as you start investing and lowering your debt, it can start to increase fairly quickly.
Benefits of Tracking Your Net Worth
Your net worth is a valuable tool to tell you the status of your overall financial health. If you have debt, your net worth can help motivate you to pay it down even faster. Not only can you see how your debt totals decrease, but you can see how paying off debt positively impacts your net worth. Even if you are only able to make the minimum payment on your debt, your net worth will start to increase.
Paying off debt increases your net worth, but so does growing your investments. This was the sweet spot for me – there are so many ways to build wealth and increase your net worth. People with debt can have a positive net worth if they have assets under their name. You’ll be able to better see how every extra $100 put towards debt or investments really affects your net worth in the long-term.
Lastly, checking your net worth puts you ahead of the curb. Instead of focusing on just your present financial situation, you are able to better see how your financial future might pan out.
How Often Should You Check Your Net Worth?
There is no hard or fast rule here. However, it really isn’t necessary to check your net worth too often. It is helpful to check in periodically to know where you stand, but if you’re paying off debt or just starting to invest, it won’t be changing drastically in the first few years.
Personal Capital is a great free tool to track your net worth. It allows you to securely input your financial data and will automatically track your net worth as you increase your assets and decrease your liabilities.
And checking your net worth isn’t something that needs to be done continuously – tracking it once every six months to a year is plenty.
Overall, tracking your net worth can be intimidating, but can provide a clear image of exactly where you stand with your finances.
Related:
Have you ever checked your net worth? How did you feel the first time you checked your net worth?
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Even when my net worth is in the negative (by a lot), I still tracked. I love being able to see how far I’ve come, and if I’m having a hard day with my personal finances, I take a look at that chart and see that slow and steady wins the race. So YES, check your net worth people!
Checking my net worth motivated me, too. It helped me to see just how far I’ve come, even if I don’t quite have a million dollars to my name yet :) It was tough to check at first, but after awhile, it really just became more motivating than anything.