Contrary to popular belief, your net worth is one of your most important financial numbers. It is the sum of your assets and liabilities. In layman terms, your net worth is the total amount of everything you own minus your debts. It gives you a holistic view of your finances – taking into account your cash, investments, property, as well as your credit card balances and loans.
Have you been ignoring your net worth all this time? Here are a few important reasons why you should start paying attention to it.
Know Where You Stand
Your net worth is important because it helps you know where you stand financially. If you are only focusing on your income, you are not looking at the bigger picture. Your income is just one part of your personal finances.
You can have a high income but still have a low net worth due to your debts. Conversely, someone with a lower income may have a higher net worth because he/she has a lot of savings and no debt. It is important to look at both your liabilities and assets to know exactly where you stand financially. Your net worth helps you do that.
Know How to Get Where You Want to Be
Knowing your net worth helps you figure out how to get where you want to be. If you have a negative net worth, you know that you need to focus on paying off your debts in order to get ahead. This may mean using the debt avalanche method to pay off high-interest debts first and save money. It may mean refinancing or consolidating your loans to get the best interest rate with one monthly payment.
Receive Budget Insight
When you monitor your net worth from month to month, you can see how fast or slow it is increasing. Based on your income and spending, you may find that your net worth could/should be increasing faster than it is. In this way, your net worth gives you insight into your budget. You can then find ways to cut back your spending. Maybe this means spending less money on convenience food and buying more groceries to cook meals at home.
Receive Investing Insight
In addition to giving insight into your budget, tracking your net worth from month to month gives you insight into your investing.
If you have a high net worth but aren’t happy with its trajectory, it may be time reevaluate your investing strategy. Are you getting at least a 7% annual return on your stock investments? If not, you may need to rebalance your portfolio to be more aggressive depending on your target withdrawal date.
Track Your Progress
Knowing your net worth helps you track your progress on your financial journey. Your net worth shows you your total sum number as you continue to pay off your debts and increase your income.
How I Track My Net Worth
Now that you know all the key reasons why you should track your net worth regularly, it’s time to find out how to do it for free.
I actually use Personal Capital to track my net worth. It is a free financial aggregator that shows you all your account information in one place. All you have to do is login to your financial accounts through Personal Capital and then the system will update you on your balances in real time. Here are some screenshots (with numbers blocked out) from my account to show you how it works.
The first things you see in your main dashboard is a graph with your net worth number. The graph on the main dashboard shows you the change in your net worth over the past 30 days. If you click it, you will bring to another screen where you can choose what period of time you would like to see the change in your net worth. Personal Capital calculates your net worth by totaling all of your linked assets (cash, home equity, etc) and debts (credit cards, loans, etc.).
Cash Flow
On the main dashboard, Personal Capital shows you your cash flow for the past 30 days. It shows you one circle chart with your income and one circle chart with your spending. This gives you a quick glance at your budget for the month. If you want more details on which categories you are spending the most, you can click on the cash flow section. You will be brought to another page that details your income sources and spending categories.
Portfolio Balances
The next section on the main dashboard is your portfolio balances. This is the total value of all your investments. It is good to regularly keep an eye on the value of your investments. If you notice a hike one day, you may want to use that as an opportunity to sell. If over time you notice that one of your accounts are generally not doing well, you may want to consider moving your money to a different fund or brokerage.
Portfolio Allocation
The last section on Personal Capital’s main dashboard shows your portfolio allocation. This shows you in what type of funds your investment money is being put. As you can see, most of my funds are in U.S. stocks. Since I am not planning on withdrawing money anytime soon, this makes sense for my portfolio.
The closer you are to retirement or to withdrawing your funds in general, the more conservative you should be with your investments.
Summary
Your net worth is the single most important number in personal finance. It gives you a holistic view of your finances by taking into account all of your assets and your debts. I use Personal Capital to track my net worth, manage my cash flow, and keep an eye on my investments.
Do you track your net worth? If so, what tools do you use?
What you said are correct. When you know your true present financial worth, you will know how to cut your cloth according to your cloth. If the cloth is not your size, you will think of what to do so that the cloth can be up to your size. I have seen many people in the corporate life how they live false life. They live above their means. They like buying cars to impress their colleagues. I hope some of them will read this article. Possibly, it will help them turn a new leaf especially in this new year.
Thanks.
It takes time and effort to shift your focus from your income and possessions to what you’re actually saving for yourself and your total net worth, but it’s so worth it!
Personal Capital is great, I use them to manage a big portion of my investments in addition to using their site to track my networth, budget, etc. The free services are great and their investment philosophy, in my opinion is state of the art.
Personal Capital is a great, quality tool! I also love that it’s free 🙂