One of the ways that you can track your financial progress is to periodically check your net worth. Your net worth is a look at one moment in time as far as your finances are concerned. It provides you with a picture of what your overall financial position is right now. Net worth offers you the chance to see where you stand, allowing you to plan for the future. It can also provide you with a yardstick to see how much progress you have made with your financial life over time.
Net worth is a fairly simple calculation. You simply add up all of your assets, and then subtract your liabilities from that number. What you end up with is your net worth.
Before you begin, you need to know the difference between an asset and a liability:
Now that you know the difference between an asset and a liability, it’s time to calculate your net worth.
Start by adding up all of your assets.
Next, total all of your liabilities.You aren’t figuring your net worth in terms of income and expenses, so you need to add up the total amount that you owe for each loan, from your mortgage to your car loan to your student loan to your credit card balances.
It’s worth noting that if you have an advanced personal finance application, like Personal Capital (free), you can connect all of your accounts and the calculations will be performed automatically on your behalf.
After you have both of these totals, subtract the liabilities from your assets. You either have
Right now, I have negative net worth, mainly due to my student loans and mortgage loan. I’ve only had a retirement account for about seven years, and my taxable investment account for four or five years, so that hasn’t been a lot of time to accumulate assets in those accounts even though I make regular contributions.
Net worth is useful for establishing a starting point for your long-term financial plans, as well as for seeing what sort of progress you are making overall with your efforts. However, net worth isn’t a replacement for understanding your cash flow. You still need to know how money moves through your personal economy, and what to expect in terms of income and expenses.
In order to effectively use net worth as a financial measuring stick, you need to figure your net worth at regular intervals. You can figure your net worth each month, each quarter, semiannually, or annually. I like to review my net worth semiannually. My efforts are long-term, focused on building long-term wealth through investing, as well as making regular bi-weekly payments on the mortgage and paying on student loans.
When I check every six months, I can see whether or not the overall picture has improved. Usually, it has. At the rate things are going, I should have positive net worth well before the mortgage is paid off and the student loans are discharged.
Performing a net worth calculation can help you stay on track with your financial goals. You can see how far you’ve come, and get an idea of what’s still left to be done.
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