Net Worth – What Is It and Why Should You Track It?

As we enter the second half of the year, I thought it would be a good time to check up on our net worth and show you how I track it.

What is Your Net Worth?

In simple words, your net worth is everything you own minus everything you owe. In accounting jargon, it is your assets minus your liabilities. Pretty simple stuff so far.

Why Should You Track It?

Your net worth is like the blood pressure of your financial life. Leave your blood pressure unchecked for a long time and you might be in for an ugly surprise. Same principle applies to your net worth, ignore it and most likely it will stay close to zero or even go negative.

So the first reason for tracking your net worth is simple: to avoid ugly surprises. What about a more exciting reason?  Motivation! Keeping track of your net worth will encourage you to make better financial decisions. After you have been at it for a few months, you will get even more motivation from seeing your net worth grow. Thus, creating a virtuous cycle to riches.

How to Track it?

My favorite tool for tracking our own net worth is Personal Capital. Personal Capital is a free online wealth management tool that allows you to link all of your accounts (checking, credit, investment, etc.) in one place. Here is a screenshots from my own account:

Net worth 7-1-16

1. Current net worth and history. 2. All accounts in one place

Ready to get started tracking your own net worth? Follow these easy steps:

  1. Sign up for free.
  2. Link you online banking and investment accounts (debit, savings, credit cards, mortgages, 401-k, etc). These will be updated automatically every time you log in to Personal Capital.
  3. Link offline stuff. For example, my Tradeking investment account could not be linked automatically (I suppose Tradeking is too small of an institution). So I had to add those assets manually. Another thing that may fall into this category is your house, or if you have a bank account with a really small bank or credit union. So far, my Tradeking account is the only thing I haven’t been able to link automatically.
  4. Done! Personal Capital will now calculate your net worth automatically and keep it up to date.

What Should You Include?

Net worth include not include

Include all liquid assets and all debts. Don’t include small stuff like furniture, gadgets, and clothes. It is hard to tell what those things are really worth, and it will be too time consuming to try to keep everything up to date.

Whether to include your car or not when calculating your net worth is a controversial point in the personal finance world. I don’t include our cars in our net worth for two reasons. First, to be conservative. Second, because I don’t see cars as assets. Cars depreciate so quickly that to keep things fair, you would have to update your car’s value every couple of months. On the flip side, a car loan or lease is definitely a liability, since it is an obligation you have to fulfill every month until the lease is up or the loan is paid off.

Some Last Thoughts

  • Be honest with yourself and be conservative. Include all debts and don’t inflate the value of your assets. Cheating on your net worth is like stepping on a weight scale and keeping one foot on the ground.
  • Don’t be discouraged if you are starting from zero or even from negative territory. It’s not a competition, focus on your own stuff and the things you can control.
  • Check out this list that compiles the net worth of many financial bloggers. It ranges from $2.3 million to negative $532,000.

 

Share your questions and comments below 🙂

 

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4 thoughts on “Net Worth – What Is It and Why Should You Track It?

  1. Thanks for the post. I have heard of Personal Capital before. So far I have sorta kept track of my net worth using a spreadsheet. Have thought about signing up for Personal Capital or Mint to make things easier. Have you tried Mint?

    • Thank you for the comment, Walt.
      I haven’t personally tried Mint. However, I read a lot about both of them and decided to go with Personal Capital. I think it is a bit better than Mint if you have investments.

  2. “Cheating on your net worth is like stepping on a weight scale and keeping one foot on the ground.”. Well said! Disonesty in general is a bad thing, but fooling yourself is just sad.

    You are lucky to be thinking about your finances from a young age. I made plenty of mistakes in my 20s. Better late than never though!

    • Thank you for your comment, Mara.
      I was indeed fortunate to find the financial independence world early on. I still wish I would have found it earlier.
      You are right. Late is better than never 🙂

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