How do you track your personal financial progress? Maybe you measure how much your savings have increased over the last year. Maybe you track the growth of your 401(k) and other investments. Maybe you do nothing at all and just hope you are making progress. The problem is, none of those ways are enough. They fail to capture the entire picture. You need to have a strategy that truly takes everything into consideration, including asset and investment fluctuations, so you can determine whether you are making progress financially or not.
So how do you do capture the entire picture?
You do it through tracking your net worth.
Why Net Worth is So Important
While having a high income can be helpful, income itself is certainly not the best indicator of financial progress. Many people have a substantial income but are not in a stable financial situation. In fact, 25% of people who earn 6 figure salaries are still living paycheck to paycheck with minimal savings. If you use all of your income just to fund your day to day life, you aren’t actually taking any steps towards improving your financial situation.
The reason net worth is the most important metric to track is because it patches together all the small pieces to give you a holistic view of your financial picture. It captures everything you OWN vs everything you OWE and tells you if you currently own more than you owe. If you do own more then you owe then then your net worth will be positive. And if you owe more than you own, then your net worth will be negative. The problem is, 73% of millennials don’t know how much they own, let alone how much they owe. Figuring out these two numbers is a crucial first step to determining your net worth.
How to Calculate Your Net Worth
To calculate your net worth, you first need to figure out your total assets (what you own) and total liabilities (what you owe) and then subtract the two numbers.
Let me give you an example. Adam is 33 years old and lives in Chicago, Illinois. He is an engineer earning $150,000 a year and has $50,000 of student loans remaining. He also owns a house that has an estimated value of $500,000 with a mortgage balance of $350,000. Lastly, he has $35,000 in savings, $125,000 in his 401(k) at work, and a ROTH IRA with a value of $20,000.
So let’s calculate Adam’s net worth.
Net Worth: (Total Assets) $680,000 – (Total Liabilities) $400,000 = $280,000
Adam has a net worth of $260,000.
As you can see, income is not in the equation for tracking your net worth. The only way for your income to impact your net worth is by using it to pay down debt or increase savings. That’s it!
Now, when you go and calculate your net worth, don’t be alarmed if you are starting out with a lower number than you thought or even if you have a negative net worth. With student loans, mortgages, and car loans, many millennials start below zero, and that’s okay. The number you just calculated is honestly not that important. It is simply a starting point to use as a point of comparison over time. So don’t beat yourself up over having a lower net worth than you expected. There is no way for you to go and change the past. Focus on the future and grow your net worth through paying down debt and increasing your savings!