Your net worth is the value of all your assets combined minus all your liabilities. You basically add up the value of all the assets you own and subtract any outstanding debts that you might also have.
Understanding and knowing your net worth is super important when it comes to your personal finance and reaching Financial Independence. Knowing your net worth is absolutely paramount if you want to grow financially, and reach your financial goals.
Let’s talk a little bit more about that.
What does net worth mean?
Your net worth is the value of all your assets minus all your debts. Assets include cash, stocks, equity in real estate, bonds, retirement account balances, etc. Debts are things like money you owe, credit card balances, car loans, etc.
Once you do this simple math, the number you come up with is your net worth. Depending on your age, your number may actually be in the negative. This typically happens if you have just graduated from college and have student debt but no assets yet.
That’s okay, you still have time to catch up and invest in more assets.
Why should you know your net worth?
I always use this quote and I am going to use it again. What gets measured gets improved. By knowing and keeping track of your net worth, you can get a very good indicator of how you are doing with your finances.
What gets measured gets improved!Tweet
If you have a lot more debts than you have assets, then it’s a clear indicator that you are over-leveraged. On the other hand, if you have many more assets and fewer liabilities, then you are in a better financial position.
Tracking it over time can help you make adjustments as needed. Always compare from the previous year to see if you are headed in a positive direction or headed backward. You don’t want to be racking up debt year-over-year. Instead, you should be aiming to eliminate debt and increase your assets.
When does your net worth matter?
Planning for your retirement is one of the most important aspects that come with knowing your net worth. If you’re close to retiring and have close to $0 in your net worth, then you have a lot of catching up to do very quickly.
It’s also a super-easy way to track your own personal progress. If your net worth is going up year-over-year, then it’s a very good indicator that you are headed in the right financial direction.
Month-over-month, year-over-year, you can actually see the impact of your different financial moves and how they are affecting you, your investment goals, and your retirement goals.
To sum it up, you should know where you stand financially as early as possible.
How to track your net worth
Now that you have a basic understanding of what this all means and why it’s important, you need to figure out how to properly and accurately track it.
There are a number of apps and websites out there that can do this for you, but I would highly recommend checking out Personal Capital. This is a free tool that allows you to monitor your net worth, and your progress throughout the years, and it gives you investment recommendations.
There is a reason why Personal Capital is so highly recommended throughout the financial world. It’s completely free to use, and it can give you a very accurate snapshot of your financial health.
Just simply connect your accounts and it will figure out which are assets and which are debts. It’ll give you a nice big number showing you what your current net worth is.
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