Net worth is important. It is a key piece of personal finance because it shows your financial health. At a very basic principle, net worth is your assets minus your liabilities.
A simple goal is to increase your net worth every month. If your net worth is increasing monthly, this means that your income > expenses. This is good! In other words, this means you have additional income to invest or save for future expenditures.
However, if you find that your net worth is constantly decreasing or is a negative number you need to start considering how to cut down on expenses or pay off your liabilities.
Do the math. Uncover what your underlying net worth is.
What is interesting about net worth is that you can’t actually tell what someone’s net worth unless you dig deeper. We usually make associations that if someone drives a nice car, wears fancy clothes, or has a big house has a high net worth. We assume that if someone has a high income than this automatically gives them a high net worth. However, what we don’t realize is that many times these high income individuals have so many expenses (because of their luxurious lifestyle) that very little of that income is going towards growing their net worth. For more information about this topic I highly suggest reading: The Millionaire Next Door by Thomas Stanley.
All this to say, net worth isn’t sexy. It’s actually pretty boring. Nobody can tell you have a high net worth, but for me and my wife having a good net worth provides a sense of financial freedom. We don’t have to worry about if we’re going to make rent this upcoming month or if we can survive if one of us loses our job. I realize that we are definitely blessed to both have full-time jobs and minimal expenses.
I like to calculate my net worth on a monthly basis because it helps me focus on my financial goals. For instance, prior to tracking my net worth I simply paid off my student loans every month. I’d pay them off, but not with a real sense of purpose. However, when I calculated my net worth and saw the huge liability number (consisting solely of our student loans) I suddenly felt the need to make higher payments towards these loans. Furthermore, as I started to make larger payments I could visualize see our liability balance decreasing (thus increasing our net worth). Tracking my net worth helped me to feel the immediate value of making payments towards student loans.
It’s pretty much like a game to me. Trying to get the highest growth percentage from month-to-month and bench-marking myself against other people in my age/income groups. My competitive nature helps drive my desire to accumulate wealth. In the end, it is net worth, not total income, that is the true measure of financial health.
I’ll write another post about how I track my net worth.