If you’ve read my article on creating a monthly budget, you’ll know that I am a firm believer in the idea that recording your spending over time helps you better control your monthly cash flow and increase your savings rate. This is an excellent exercise on a month-to-month basis, but your financial journey will span several decades. With this in mind, tracking your net worth on a long-term basis will give your monthly budgets greater context and force you to measure your overall progress on a larger scale.
Here’s what we’ll cover in this article:
- Tracking Net Worth Systematically Ensures Your Success
- What Is Net Worth, Really?
- How Do I Track My Net Worth?
- Closing Thoughts
Tracking Net Worth Systematically Ensures Your Success
As I expressed in my monthly-budgeting article, not all wealthy individuals use a budget. Similarly, not all wealthy individuals monitor their net worth regularly. However, it stands to reason that monitoring your net worth is, like using a budget, a way to keep yourself accountable and on the right track.
I liken trying to build wealth without using a budget and without tracking your net worth to trying to build an amazing physique without any sort of workout plan or progress checkups (e.g., weigh-ins, body-fat measurements, personal records for heavy lifts, etc.). Simply making a good effort in either context will likely bring some positive results, but consistently and systematically tracking your progress via key metrics is a way to maximize your growth potential.
What Is Net Worth, Really?
In theory, net worth is simply your assets less your liabilities. In practice, people use different formulas for calculating net worth. I will go over a couple of the more popular formulas for net worth below, but honestly, which formula you use does not matter. Again, the importance of this exercise is that you are tracking your net worth consistently so that you ensure you’re making progress over time.
Total Net Worth
Logically, total net worth is all-encompassing, meaning that it includes the current market value of all your assets (e.g. real estate, bank accounts, cars, expensive jewelry, etc.) and all of your liabilities (e.g. mortgages, student loans, credit-card balances, etc.). Essentially, you sum the current values of each of your assets and reduce that by the sum of the current values of each of your liabilities.
Liquid Net Worth
Liquid net worth differs from total net worth in that it also accounts for the cost to liquidate your assets immediately (e.g. you may have to sell your house at 80% of current market value to sell it tonight). Liquid net worth tells you what your total value would be in a pinch, such as if you had a major medical emergency.
How Do I Track My Net Worth?
At a minimum, you could manually calculate your total and/or liquid net worth at the end of each year on a sheet of paper. If you go this route, NerdWallet has a good calculator for manually calculating your net worth here.
Instead, however, I recommend that you use software to automate this process and provide real-time values whenever you want them.
To accomplish this, I use the Empower Personal Dashboard (note: not an affiliate link), formerly known as Personal Capital, which is a free mobile and web application that securely presents your current account values and allows you to enter manual values for items such as cars and real estate, all of which are displayed in an intuitive dashboard. A screenshot of a sample dashboard is posted below.
A sample of the Empower Personal Dashboard (formerly Personal Capital).
Empower: Setup and Security
If you go the Empower route, all that you have to do once you’ve created an Empower Personal Dashboard account is spend a few minutes authenticating securely to any bank/credit accounts you’d like to include, then enter any manual asset/liability values that can’t be pulled automatically. Everything else is fully automated going forward.
If you’d like to check your net worth at any time, just open up the app on your phone or browse to the website on your computer, log in, and give the app a minute or two to pull your real-time account values.
From a security standpoint, Empower applies and continuously incorporates security best practices into their app. All credentials for any bank/credit accounts that you enter into Empower Personal Dashboard are fully encrypted both at rest and in transit, never accessible to Empower employees, and further protected with optional multi-factor authentication (MFA). Additionally, you are strictly providing Empower Personal Dashboard with read-only access to those accounts, so that it can update the current values in your dashboard.
Empower will not and cannot execute any transactions or perform any balance transfers on your accounts. You can find more info about security practices for the Empower Personal Dashboard in their documentation. Also, for general data security best practices in personal finance, check out my article here.
Closing Thoughts
Tracking your net worth, along with using a monthly budget, will aid you in your journey into The Wealth Vault. If you’re a young professional or recent graduate, there is a good chance that your net worth is either zero or negative, depending upon whether you have student loans. If that’s the case, do not be deterred or feel bad. When it comes to net worth, what matters is not the point from which you’re starting, but the point to which you’re heading, and the rate at which you’re moving there.
Wealth Explorers, have you ever calculated your net worth? If so, how did you do it? What thoughts do you have regarding net-worth calculations or aspirations? Share below!
