Why is tracking your net worth important? First off, let’s start by defining net worth! Net worth is the total value of all assets minus the value of all liabilities and debt. Tracking your personal net worth is useful in determining your financial health at a particular point in time.
Although not a holistic view of financial health, it provides a snapshot of your financial picture and gives you an idea of where you should be focusing.
What is Net Worth Used For?
Net worth has many uses! It is useful for individuals, financial institutions, as well as partnerships and other smaller groups.
Net Worth for Individuals
Net worth is used by individuals to know how they are doing financially. Are they underwater in debt and liabilities that outweigh their assets? Or are they flush with cash-flowing real estate and investments that offset any debt or liabilities they may be holding?
When reviewing your net worth tracker (available for free download below), you can see based on the automatic calculations where you can make improvements to increase your net worth.
Action items like paying off student loan debt, paying off credit card and other high-interest debt, and purchasing appreciating assets like real estate all lead to a higher net worth.
Over the course of your life, you should be striving to grow your personal net worth! This is a great way of tracking your continual progress and to know that you are not stagnating with your finances.
Considering Net Worth in Other Situations
Net worth is often considered by financial institutions when applying for loans, working with joint venture partners, or starting large projects that require SEC filings or personal guaranties of notes.
For example, when applying for a commercial or business loan, the bank will almost certainly require a complete financial background on you as the borrower. This includes background checks, credit checks, and a personal financial statement detailing your assets and liabilities to illustrate your net worth. This is showing the lender that as a borrower, you have the ability to secure your debts should you default on the note. These financial documents when working with lenders is almost always accompanied by an affidavit affirming that all information is sworn to be correct under penalty of law.
What Are Assets and Liabilities?
If you do not come from an accounting or finance background or already have an understanding of assets and liabilities, do not fear. We all start somewhere, and we aren’t going to let that keep you from determining your net worth!
Diving Deep Into Assets
Assets are anything that you own that have positive value and can be sold. Examples of assets include:
- Real Estate
- Your Homestead
- Investment Properties
- Publicly traded stocks and bonds
- Privately held stocks and bonds
- Equity in Partnerships
- Deferred Compensation Packages
- Retirement Plans
- Personal Property
- Collectible Art
- Notes Receivable/Accounts Receivable
- Life Insurance
- MUCH MORE
What Are Liabilities?
Liabilities are anything that you own that you have agreed to pay someone money for at some point in the future (near or distant). This could be the car you put on payments last month (for the next 3 years) or the mortgage that you’ve got on your home.
A few more examples:
- Your Homestead (specifically, the mortgage or deed of trust on your property)
- Notes Payable (bank debt or otherwise)
- Credit Card Debt
- Accounts Payable
- Any Other Liabilities
When Should I Be Tracking My Net Worth?
Your net worth is something you should be tracking and recording on a regular basis! At a minimum it is a habit you should get into doing at least annually for yourself and your family. Ideally, you should be working towards tracking your net worth on a quarterly and eventually monthly basis.
Tracking your net worth on a quarterly basis allows you to see where you are at each quarter after 12 weeks of efforts to make corrections. Some might argue that tracking on a monthly basis is too frequent, but it can also allow you to see how acutely your actions each month affect your finances.
Personally, I am tracking mine monthly but paying especially close attention to my quarterly statements. If something out of the ordinary catches my attention on a monthly report, this allows me to begin making adjustments and course correct.