Your net worth is the calculation of your assets (e.g., savings accounts, investments, owned property) minus your liabilities (e.g., loans, credit card debt). Calculating it for the first time might not be easy, but it is an important step in financial planning. Once you establish a format for calculating your net worth, it should be easy to repeat the process on a regular (at least annual) basis. Each year’s update will serve as a measure of your financial progress. Some financial managers regard 10% growth in net worth yearly a feasible goal.
Knowing your net worth can give you a general picture of your financial health. Here are a few other benefits:
An annual net worth statement can help you monitor your financial progress over a long period of time.
Off the top of your head, do you know if you had more money last year than the year before? It’s not necessarily as simple as looking at your W2s from those years. For example, you might have had a higher salary in 2012, but you could have also spent more money, too. Maybe a purchase you made in 2012 increased your liabilities, or perhaps you put more money into savings and investments in 2011.
Once you have calculated your net worth for a few years, you might see trends in your finances that can either be an encouraging confirmation of your fiscal responsibility or the alarming wake-up call that you need to get your finances in order. (Seeing inconsistencies in your net worth instead of a trend can be telling, too).
An annual net worth statement can help you set and reach goals.
Setting goals within the context of your overall financial outlook can help you figure out just how effective those goals are. If you are succeeding in your goals but find that they aren’t effectively improving your net worth, it might be time to make adjustments and set new goals.
It can help you evaluate your assets.
Do you have enough money in savings in case of an emergency? Are you too heavily invested in bonds? What about stocks? Do you have more than enough money in your checking account – but not enough in your retirement accounts? Do you know how much your house, car, and other personal property is worth? In addition to providing valuable information, your net worth statement can indicate the parts of your finances that need adjustments.
Personal net worth worksheet
You can find our personal cash flow analysis and net worth worksheet here. Don’t forget – make this an annual exercise and not a one-time thing.
Do you know your net worth? Has this information changed your outlook on your finances?