Why You Should Care About Net Worth

Why You Should Care About Net Worth
 
Do you know your blood type?
I honestly didn’t know mine until a couple of months ago. I am a type A.
How about your Net Worth? Do you know yours?
Everyone has one. It could be negative or positive.
It could actually be $0.
It is important that you know your net worth. Most people don’t. You need to know how good or bad your situation is before you can start moving forward.
“If you don’t know where you are, you won’t know where you are going.”
How can we build wealth if we can’t track our progress?
Net worth is one of those terms you have to get familiar with if you want to get control of your finances.
Do you know how to calculate net worth?  If you don’t, this post is for you.

Why you should know your Net Worth?

Net worth to financial health is like blood pressure to physical health.  Both are metrics that can tell you if you are in good shape or bad shape.  Net worth is basically the measurement of one’s wealth.  Trent @ TheSimpleDollar.com put it this way:
 

 “Your net worth is what you would have in cash if you sold every significant possession and paid off all of your debts. A net worth is a useful way to gauge many different kinds of personal finance progress all at once”

Not everyone has a budget, but everyone has a net worth.  So news flash, you have a net worth amount.

We just have to calculate it.  If you have never calculated your net worth, I will walk you through it.
 

Add up assets

To start, you will have to list out all of your assets.  Examples would be savings accounts, investments, house, and cars.  You could also include jewelry and electronics.  I recommend that you set a threshold amount.  For example, I usually include items that valued at more than $1000.  Anything less than $1000, I do not include because it makes things easier and quicker to assess.  Technically, you could go around your apartment and value every item you own, but nobody got time for that.
 
You may have items that you are not able to value confidently.  For your car, use Kelly Blue Book to determine its value.  To get a good estimate, plug in the car’s make, year and mileage.  For jewelry, get it appraised by a professional unless you know the specifications of the item. For electronics and other items, check out the going rate for these items on eBay.com to get a ballpark valuation.

 

Add up debts

This is the easy step.  I am sure you know all your loans by heart, but list them out anyway.  Student and auto loans.  Home and personal loans. Credit card balances.  Health and auto insurance bills.  Make sure if you have any handshake IOU agreements with your uncle, add them in there too.

Total AssetsTotal Debts = Net Worth

Why you should care?

It is easy to get net worth confused with the cash balance in your bank account.  The issue with this is that you could have $10K in the bank and $30K in student loans.  You may feel pretty financially stable with $10K in cash, but you still have the lingering $30K that you owe the bank.  Your simple net worth formula would look like this:

$10K in Assets$30K in liabilities = – $20K Net Worth

Strictly looking at the cash you have on hand is deceiving.  Net Worth brings in your outstanding debt which paints a dramatically different picture.  The first step in getting control of financial life is identifying issues.  Calculating one’s net worth has a way of revealing how bad (or good) your financial situation is.  It takes some work and thoughtfulness that most people are not willing to do.
 

Don’t worry it’s a snapshot

For most of you, when you calculate your net worth for the first time, the number you see will probably be negative.  It’s ok.  We just have some work to do.  Remember, this is just a snapshot.  Net worth measures your financial situation at one particular moment.  Your net worth could change tomorrow.  It is directly impacted by your financial behavior.  If you decide tomorrow to pay down some of your debt, your net worth will immediately go up.  Or if you decide to take out a car loan tomorrow, your net worth will go down.

Recalculate your net worth often

Some people calculate their net worth once a year.  Others calculate it once a month.  If you are working on reducing your debt load, I would suggest calculating your net worth monthly or quarterly.  It will allow you to track your progress.

Measuring Net Worth is like Measuring Your Weight

So you started a rhythm of calculating your net worth consistently.  But you notice your numbers are fluctuating.  Why is that happening?
Think of it like this: measuring net worth is like measuring your body weight.  Your weight can fluctuate throughout the day depending on what you eat or drink.
“Throughout the day, our body will hold onto fluids as we eat and drink.  Just two cups of water — and there’s water in food, too — can add an extra pound.” –Kelly Hogan, MS, RD, CDN at Mount Sinai Hospital
As mentioned earlier, your daily financial moves have immediate impact on your net worth, similar to how drinking multiple cups of water or eating a big juicy cheeseburger would impact your health.
When measuring net worth, the trend you see over a couple of months says more than the trend covering a couple of days or a week.   In other words, it is best to have a long term perspective when looking at net worth,
The goal here is to get a net worth out of the red and into the black.  After that, the sky is the limit.
 
Do you track your net worth?  Let me know your thoughts in the comments.