Tracking Your Net Worth: Proven Way to Building Wealth

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When you are on the quest to find financial freedom, tracking your net worth becomes more and more important.  Before Rob an I started our journey to pay off our debt, we had no clue what our net worth was…nor did we care.   Following our deep dive into our finances and paying off over $50,000 worth of debt in six months, we vowed we will never find ourselves in the same situation again.

On this journey, we learned of the motivational power of knowing our net worth.  It is this number that assures us that we are on the right path financially or helps us to guide us when we need to self-correct.

Now that we know the power of this number, our goal is to teach you how can track your net worth too.  In this post we will cover:

  • What is the difference between your budget and your net worth?
  • Why is knowing your net worth so important?
  • How do you calculate your net worth?
  • How often do I need to calculate my net worth?
  • Are you on track?  What is the average net worth by age for the United States?

What is the difference between your budget and your net worth?

Your budget is your money plan.  It keeps track of your income and your expenses and allows you to tell your money what to do.

Your net worth is the outcome of following your plan.  It is the difference between what you own, all that you owe;  if you sold everything and paid it off, your net worth is the money leftover.

To make this fancy, your net worth is the difference between your assets and liabilities.

Find out more about what a budget is:

Why is knowing your net worth so important?

When our kids moved out, Rob and I realized that our next big milestone in life is retirement.  That realization is like getting hit over the head with a ton of bricks.  It is that point where we started wondering if we are on target to retire with dignity.

Then we learned of the benefits of tracking our net worth and how it is the true measurement of our overall financial health.

By monitoring our money, our level of engagement increases and it allows us to make the decisions required to build wealth and freedom.

What we found through tracking our net worth is we saw the direct result of paying down our debt, adding money to our savings account, or stashing money in our retirement accounts.

It is a process that provides you with a visual to all of your hard work.

How do you calculate net worth?

Your net worth is nothing more than the difference between what you own and what you owe.  In the world of finance, the things you own are referred to assets and the money that you owe is called liabilities.  Your net worth is the remaining balance.

Assets (the things you own)

– Liabilities (the money you owe)

= Net Worth (the money left over)

Calculating your net worth is a simple process that allows you to see the good, the bad, and the ugly facets of your finances.

This is a process that helps you to ensure that you are on track to reach your financial goals such as: buying a home, retiring early, paying for your child to go to college or maybe it is that point in which you will make it into the millionaire club.

More than 10.2 million households had a net worth of $1 million to $5 million, not including the value of their primary residence, according to a survey by the Spectrem Group. That’s up 2.5 percent from 2017.  – Bloomberg, The U.S. Now Has More Millionaires Than Sweden Has People

What assets count when calculating my net worth? definition of an asset is:  “items of ownership convertible into cash” definition of an asset is:  "items of ownership convertible into cash"

When it comes to assets that you include in your net worth calculation, the waters get a bit muddy amongst the “professionals” on the web.

Some think that you should use the value of your vehicle, where others believe that you shouldn’t because it is a necessity that you must have and if you sold it, you would have to replace it.  The odd part of this debate is that everyone agrees that if you have a loan on the car, the loan balance is a liability.

The way I look at it is:  This is article focuses on personal finance.  Personal finance is just that – personal.  Since it’s personal, you can do whatever you want!  😉

We do not count the value of our vehicles as the impact is minimal.

Examples of Assets:

  • Checking and Savings Account Balances
  • Current Resale Value of Your Home and/or rental property (Your mortgage is in the liability section)
  • Retirement Account Balances – This includes your 401 (k), IRA, Pension, etc.
  • Present Day Car Value (That’s the controversial one – you decide)
  • Cash
  • Stocks, Bonds, CDs, Money Market Balances
  • Anything Else that You Can Sell for Cash

What liabilities do I include in this net worth formula?

Liabilities are pretty straight forward.  A liability is an amount that you owe to someone else.

Examples of Assets:

  • Mortgage Balance
  • Car Loan Balance
  • Credit Card Balance
  • Student Loan Balance
  • Personal Loan Balance
  • Medical Debt
  • Back Taxes

Frequency in calculating your net worth

The answer to how often you should calculate your net worth is very personal and dependent on your current financial goals.  Here are a few ways that you can look at the value of this process and decide a frequency that works for you.

If your goal is to build wealth or pay down debt, the reality is that it will not happen overnight.  These are processes that can take months or even years to achieve.  The frequency in which you track this magical number is your way to:

  • Find motivation and focus
  • Measure your success
  • Identify areas that need more attention

Monthly Financial Goals:  Run the calculations again next month if you are in the process of paying down debt or building up your savings in a hurry.  By running the numbers every month, you will know exactly how successful you are in reaching your ambitious goals.

Related:  How to Pay Off Debt Fast with Dave Ramsey’s Budget Plan FAQ

Quarterly Financial Goals:  If you are setting goals at a more relaxed pace, yet need assurance that you are progressing, we recommend updating your calculations quarterly.  By monitoring your information monthly, you remain engaged in your finances and have the ability to correct the course if your investments are underperforming.

Annual Financial Goals:  Quite often, personal net worth calculations only need to be updated on an annual basis.  The annual approach is a great way to update your financial statements if your goals are long game goals or if you just cannot stand the monthly and quarterly ups and downs of the market.

What is the average net worth by age for the United States?

Knowing Americans net worth average is a great way to gauge your success in managing your money and push yourself to be better than average.

The average net worth for those age 65-69 is $194,226. When you are ready to retire, you should have ten times your final salary saved. Listen Money Matters

The numbers are pretty bleak and support the need for you to engage in your finances.

Related:  Our 7 Steps to Retirement | 41% of Retirees Live on Less than $25,000

Average Net Worth by Age - Don't be Average

In conclusion

So if you are on the quest to finding financial freedom, pay close attention to your net worth.  When building wealth, this is the number that is your true indicator that you are on target for reaching all of your money goals.

It is the number that will…

  • Motivate you and push you through the down times.
  • Show you where your financial strengths and weakness are
  • Remind you of where you have been so you can focus on where you are going

Do you keep track of your net worth?  How frequently do you update your numbers?  Comment below!

Tracking Your Net Worth

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