Why you need to calculate your net worth annually
No matter where you are along your financial independence journey, running the numbers by calculating your net worth is an invaluable way to determine your financial health.
By keeping an eye on your finances, you will inherently increase your awareness and money management skills quicker than you think. If you are the type of person that considers themselves a poor money manager, then perhaps it is time to change that skill.
Is it possible that you are bad with money because you don't track it? Do you think you would get better or worse with your finances if you started paying more attention to them?
The basics for calculating net worth are as follows: assets - liabilities = net worth
An asset is anything you can exchange for future monetary or economic value and are assessed at present value to the marketplace.
A liability is a debt or expense that you owe. This is also assessed at present value. Include everything here, no matter how embarrassing the liability might be. People finance everything these days from furniture to pets, so don't be discouraged and include every last outstanding debt.
The reasons you should track your net worth regularly
First and foremost, you need to track it because it provides instant feedback on how well you are doing managing your financial portfolio. Only those saddled with debt and living check to check don't know what a portfolio is. Truth is, I believe all you need for a portfolio is a positive net worth.
Once you attain a positive net worth, by eliminating all of your debts (the mortgage is the only thing that could possibly stay), then you can worry about managing your investments.
The real-time feedback that your net worth provides gives direct insight to the following questions:
Besides gaining insight into your overall financial picture, tracking your net worth allows you to learn something new about yourself or even become a different type of person altogether. As the late Jim Rohn always said (paraphrasing), "Don't do something just for the sake of doing it, but rather do it for what you will become in the process". If you were previously the type of person who is terrible at money management, now you can start to become the type of person who is rather skilled at it. Imagine what you will learn along the way. You certainly don't need to know much more than the difference between an asset and a liability to get started, but I promise you will pick up many more money-related skills along the way.
Another reason to consider tracking your finances (at least annually) is because it helps you stay motivated on your financial journey. Make a game out of it and embrace the milestones along the way. Find economical ways to celebrate when you hit certain savings and net worth goals to keep you motivated. The reality is that far too often I hear of tracking finances as a source of anxiety instead of motivation. Some years you will make large strides and other years will feel like a standstill. Just remember, the path to financial independence is not supposed to be a smooth and linear road.
You will be amazed at what you learn as you practice tracking your net worth every year. For example, just four years ago I had no idea what a 457(b) was. Fast forward four years and my wife and I not only have 457(b) plans, but we have saved over $50,000 in them. I am not gloating but rather illustrating to you my very point in which I started the paragraph: you are going to learn a tremendous amount about money along the way. You will discover things along the way that you never imagined will accelerate your net worth just because you will be searching online and asking questions about terms to which you did not previously know. It is by searching and asking that you will expand your financial knowledge, and almost assuredly your net worth, along the way.
Lastly, you will be able to share with others and help them along their path as well (if you so choose). Use this superpower with caution and do not be condescending when offering others advice. Be helpful and encouraging and share with them that you had little to no knowledge of any of this just a short time ago. Imagine the satisfaction you would have in starting to teach others about personal finance knowing you once were as bad, or maybe worse, at managing money than they are. This last reason is optional, yet I argue one of the most important reasons to stay abreast of your financial snapshot, and therefore stay on top of all the financial education out there.
The morale to the story is that you have the ability to improve your financial situation just by keeping track of it. What gets measured can be improved. If you don't measure something, it is very difficult to know if you are improving it. So quit procrastinating and start tracking. Track your net worth. Track your expenses. Track your investment contributions and savings rates. If it causes you anxiety initially, that's alright and often to be expected. Stay the course and keep going. If you simply cannot get over the stress of managing money, then perhaps it's time to seek the guidance of a financial professional after all.
Leave a comment below. What have you learned by tracking your money over time?
I started this blog because friends and family often asked me similar questions regarding personal finance. I was surprised just how much people were interested in improving their financial situation, yet had no idea where to start. It made perfect sense to start a blog and share all the information that I have learned along the way with others. You will find many resources and links referred throughout the blog. I have found all of this information useful and continue to grow my knowledge and understanding in the personal finance space. Admittedly, even I struggled heavily in the beginning with understanding how to improve my financial situation. The power of reading and note taking got me where I am today and will continue to provide a return on investment for years to come. I look forward to sharing with you along the way.