The Most Important Financial Number

Most Important Financial Number

As you work your ass off to make good financial decisions, how can you tell whether you’re actually making progress? How do you know whether all that work is paying off?
There are a lot of ways to look at it, but there’s one number that provides both the best snapshot of your current financial health and the best measure of your progress over time:

Your net worth.

Your net worth is calculated by adding up everything you own and subtracting everything you owe, resulting in a single dollar amount that represents your current total wealth.

It doesn’t explain everything about your financial situation, and next week we’ll talk about some situations in which it can be at least a little misleading.

But it’s the single best measure of your financial health, and in this post you’ll learn exactly what it is, why it’s important, and how you can measure it yourself.

What is net worth?

Simply put, your net worth is the sum of all the financial assets you own minus all of the debts you owe.

  • Falling under the everything you own category are things like:
  • Checking and savings accounts
  • Retirement accounts
  • A house
  • Your share in a business

Falling under the everything you owe category are things like:

  • A mortgage
  • Student loans
  • Auto loans
  • Credit cards

Add up everything in the first category, subtract everything in the second category, and you arrive at a single dollar amount that represents your current financial wealth.

For example, let’s say that these are your items under the everything you own category:

  • $20,000 in checking and savings
  • $50,000 in retirement accounts
  • $200,000 house

Add those up and you OWN a total of $270,000 worth of financial assets.

Now let’s say that you also have the following items under the everything you owe category:

  • $15,000 in student loans
  • $5,000 balance on credit cards
  • $180,000 mortgage

Add those up and you OWE a total of $200,000 to other people.

Then you simply subtract the $200,000 you owe from the $270,000 you own, and you get a net worth of $70,000.

Your net worth can be either positive or negative, and below I’ll share some tools you can use to both calculate your current net worth and, more importantly, track your progress over time.

Why net worth is the most important financial number

There’s one simple reason why your net worth is the best measure of both your current financial health and the financial progress you’re making over time:

Almost every good financial decision you can make serves to either grow or protect your net worth.

  • Saving and investing increase the financial assets you own.
  • Paying off debt decreases the amount you owe to other people.
  • Buying a house should, over time, increase the amount you own (though you should be careful about considering it an investment).
  • Negotiating a raise, getting a better job, or starting a business will increase your income, allowing you to save even more.

All of those are done with the goal of either adding to the things you own side of the net worth equation or subtracting from the things you owe side.

Other important financial goals, like buying insurance and writing wills, work differently. They require you to spend money rather than grow it, which means that in most cases they will actually subtract from your net worth (at least in the short term).

BUT they serve an important purpose: they protect your net worth from worst case scenarios. They ensure that the people you love the most will always have the financial resources they need, no matter what.

What all that means is that if you’re consistently making good financial decisions, your net worth should steadily be trending upward over time.

And THAT’S why net worth is the most important financial number.

How to measure your net worth

Because it’s such a good indicator of financial progress, measuring your net worth on a regular basis is one of the best things you can do to improve your financial situation.
Personally, I do it monthly so that I can regularly see where our account balances are growing, where they’re not, and quickly spot trends that are either particularly troubling or are reason for encouragement.

Note that the goal here isn’t to have a large net worth right now, though of course it would be great if you do!

The goal is to measure it now, keep measuring it on a consistent basis, and track your progress over time. Even if your net worth is negative, you can feel good about the financial decisions you’re making if it’s consistently trending upward.

So, how can you measure and track your net worth?

I use a combination of tools:

1. Mint.com

I like mint.com because it aggregates your accounts and updates everything automatically. Once everything is linked, you have a single place you can log in to see all of your account balances in one place.

YNAB is another tool that does this for you, as is Personal Capital. (Though be warned that if you have enough money, you will get sales calls from Personal Capital asking you to invest with them. Those can be pretty annoying.)

Of course, you don’t have to use any account aggregation tool if you don’t want to. You can always log into each financial institution individually and grab the numbers yourself. You’ll need a spreadsheet to keep track of the information if you go that route, which brings me to…

2. Spreadsheet

Even though I use mint.com, I still record my net worth in a spreadsheet each month so that I can control how I track my progress over time.

Here’s a simple template you can use: Net Worth Tracker.

And here’s how to use it:

  1. Each month, record your current account balances in the Current Net Worth tab. You can of course edit the rows and change names here to reflect the accounts you actually have.
  2. Once all your account balances are entered, you will see your Net Worth displayed at the bottom.
  3. In the Net Worth Progress tab, add a new row with the current date and your current net worth.
  4. Copy the % Change Since Last and % Change All Time cells from the row above and paste them into your new row. (Quick note: these calculations won’t work when there’s a change from negative to positive or vice-versa.)
  5. As you add rows the graph will automatically update as well.
  6. Both the % Change values and the graph allow you to easily see the progress you’re making along the way.

I’ve pre-populated the template with the example numbers from above so you can see how it works. But obviously you can delete those and add your own.

And if you’d like to shop around a little bit, here are a few more templates you can try out:

3. What to include

One of the big questions is what should and shouldn’t be included in your net worth.

All of the items mentioned above, like checking and savings accounts, investment accounts, student loans, and credit cards, should definitely be included.

But what about your cars? What about an engagement ring?

You’ll find plenty of different answers to this question, but a good rule of thumb is that you should include anything that meets all of the following four conditions:

  1. It could be sold relatively easily
  2. It could be sold in a relatively short amount of time
  3. You know how much it would sell for (at least a good estimate)
  4. You would be willing to sell it

Generally that leads to including things like cars and excluding things like engagement rings and most other personal property. Things like your share in a business are trickier both because it can be difficult to know the value and because it may not be easy to sell, so you’ll have to use your best judgment.

The real goal here is to be consistent as you measure it over time and to not make it more complicated than it has to be.

What’s your net worth?

Measuring your net worth and tracking your progress over time is one of the best ways to improve your financial situation, simply because measuring it will make you acutely aware of what’s working and what isn’t.

You shouldn’t expect it to always go up because something like a stock market drop could cause it to decrease through no fault of your own.

But if you’re consistently making good financial decisions, you WILL see an upward trend over time.

No other number can make that claim as definitively as your net worth.

 

This post originally appeared on Mom and Dad Money.

Matt-BeckerAbout the Author: This post originally appeared on Mom and Dad Money. Matt Becker is a financial advisor and the founder of Mom and Dad Money, a financial planning firm specializing in serving new parents and young families. You can learn more by connecting with Matt on LinkedIn.

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