A Beginner’s Guide To Net Worth Tracking

Tracking your net worth is the most important step you can take to improve your overall finances.  If you’ve been doing your budget, tracking your net worth is a step up from that. It gives you an overall picture of your finances. Today, I’m going to talk about net worth tracking in great details and why it matters.

I’ve been tracking our net worth since 2013. It started when I seriously looked at our finances and wanted to pursue financial independence. I’ve always been good at tracking our expenses and doing our budget. However, it got to the point where I wanted to see our finances in a big picture. Being good at budgeting isn’t enough. Tracking expenses don’t give me an overall picture of our finances. So I started to learn everything about “NET WORTH”. I was quite surprised that net worth was more financially important metric than I thought it would be.

Here’s everything you would want to know about net worth tracking.

What is net worth?

By definition, net worth means the difference between your assets and your liabilities. The liabilities are the sum of everything that you owe. While the assets are the sum of cash and cash equivalent that you own. Cash equivalent means pretty much everything that you own that can convert to cash. This includes real estate investment properties, cars, jewelry, precious metals, artwork, collectibles, and the like.

Most people include their home in their net worth calculation. The one main reason for listing their primary residence on the calculation is because your home can be used as collateral when applying for a loan. The other main reason is that they list their home mortgage in the liabilities. So listing your home as an asset makes more sense if you include it in your liabilities. Or simply you’ll get cash from selling your house if you really had to sell it.

*On the other hand, some people prefer not to include their home in their net worth calculation. One of the main reasons is because they wouldn’t want to sell it. Or they don’t have any plan to sell it. Personally, I don’t include the value of our home in the calculation even though I list our home mortgage in the liabilities. I have to admit that I’m very conservative when it comes to our net worth calculation. We don’t really own our home yet (because we’re still making the mortgage payment). It’s not ours yet. I’ll include it when we pay it off. The main reason is that I want our net worth to truly reflect our cash flow toward our financial independence goals.

Depending on your financial goals, it’s really a personal choice what should be included and what not when it comes to net worth calculation.

To make it simple, net worth is the difference between the two numbers. Basically, it’s a financial metric that represents your financial score on a grand scale.

Reasons to track your net worth

1. You want financial freedom and/or want to pursue financial independence

Tracking your net worth is one of the first steps if you want to pursue a financial peace of mind. It can tell you if you’re on the right track and what you need to improve (by increasing your assets and decreasing your liabilities). It can also predict how long it takes to reach those goals.

This is the main reason I wanted to track our net worth.

2. You want to get out of debt

Tracking net worth gives you a big picture of how you are doing financially. It relates to budgeting and how well you follow your monthly budget plan. If you want to get out of debt, tracking your net worth can motivate you to reduce your spending. It’s because you would want to see your net worth go up.

Think of it this way. Each month you accumulate assets through income you earn and build up liabilities through debt you owe. If you spend more than you make, the difference lowers your net worth. On the opposite side, if you spend less than you make, the difference increases your net worth. This positive difference may result in an increase in your savings or your retirement accounts. Or perhaps, the difference could go to pay down debt you owe. Regardless of where you put your positive difference, your net worth goes up.

Seeing your net worth goes up really psychologically motivates you to pay down your debt faster. As well as seeing your net worth goes down may psychologically affect the way you spend your money. I don’t know about you, but for me, tracking our net worth really helped me tackle our debt insanely fast. Read how we got out of nearly $100K of debt in under 6 years.

3. It tells you how financially fit you are

Positive net worth means that you own more than you owe. On the other hand, a negative net worth means that you owe more than you own.

An increase in net worth (either positive or negative net worth) means that you’re doing a good job at assets building and debt minimizing. A decrease in net worth (either positive or negative net worth) means that your financial health is declining.

4. You want to know where you stand financially

Net worth is one of the most financial metrics we track. Since it is a big picture of your overall finances, a net worth can tell you where you stand financially.  Either a positive or negative net worth represents the sum of the assets you’ve accumulated over your lifetime in one set of numbers. Then you get a snapshot of your financial progress by deducting your current debts.

5. It helps you make smarter financial decisions

The ways you spend your money will affect your net worth directly. By seeing your net worth going down or up, will help you make smarter financial decisions. For example, instead of spending money on things that decrease your net worth, perhaps, you may end up spending money on things that increase your net worth.

6. It helps you reach your financial goals faster

Tracking net worth helps you see where you stand financially. It can be a good benchmark to help you reach your financial goals faster knowing where you’re at.  Also, seeing how you’re doing financially on a routine basis can be very motivating. For me, I want to see our net worth going up not going down, and the way to achieve that is either reducing liabilities or increasing assets or doing both.

How to calculate your net worth

The good news is calculating your net worth is very easy. You just need to sum up your assets and your liabilities and then take the difference between the two. The tricky part is deciding what goes to assets and liabilities.

Net Worth = Assets – Liabilities

Assets: cash value of things that you own

Your assets include the followings:

1. Cash in your checking, saving, CD, and investment accounts
2. The balance on your retirement accounts
3. The value of your real estate investment
4. Cash value on your life insurance policies (if applicable)
5. Bonds and Treasury bills
6. The value of your jewelry and precious metals like gold and silver
7. Things of value that can be sold/converted to cash like collectibles and artwork
8. Business assets
9. The value of your cars**
10.  The value of your primary residence*

**Some people prefer not to include personal cars in their assets due to its depreciation value. While some others do include it in the calculation to offset the impact of having a car loan or for some other personal reasons. Depending on your financial goals, it’s really a personal choice what should and should not be included when it comes to net worth calculation. As long as you understand the concept and know what your financial goals are, it’s your number so it’s up to you.

Liabilities: cash value of things that you owe

Your liabilities include the followings:

1. Consumer debt: loans, credit card debts, personal loans, and auto loans
2. Student loans
3. Medically related debt
4. Home Equity Line of Credit
5. Mortgage loans on your primary residence, vacation home, and real estate investment
6. Cash and cash value on things that you owe to other people

Negative net worth: Is that even possible?

Yes, it’s possible! If your liabilities are more than your assets, you’ll get a negative number. And that means there’s plenty of room for you to improve financially. If you have been following our annual net worth reports, you’ll see that we’ve been having a negative number.

How to track your net worth

By now you know how to calculate your net worth, next is to track it. There are a couple of ways to do it. I’ll begin with the most simple one. This good old-fashioned pen-and-paper method is good and simple. You don’t need anything, just pen and paper. Also, it’s great to do it this way the first time because you get a deep understanding of where everything comes from.

You should start tracking your net worth on a monthly basis. This way it gives you a monthly trend of your overall financial health. At the end of each month, you’ll need to calculate your net worth and plot it on a graph. On the graph, put ‘Month’ on an x-axis (the line along the bottom; horizontal) and put ‘Net Worth’ on a y-axis (the line up the side; vertical). After a few months, you can see your monthly net worth trend.

If the line is going up, it means your net worth is going up. You’re doing great! Even though your net worth numbers are negative. As long as the line is going up. You’re doing great. Basically, it means you’re getting better month after month. As long as the line is up, you rock!

If the line is going down, it means your net worth is going down. You’ll need to look at what brings your net worth down. Most likely, it’d be an increase in your liabilities. Check your credit card/bank account statements to see if you spend extra in any categories.

A monthly net worth trend is quick and easy. However, it only gives you a small snapshot of your finances. To make it more meaningful, you should start tracking your net worth on an annual basis. This just means instead of plotting your numbers based on months, you just plot your numbers based on years. An annual trend gives you a better and more meaningful understanding of your finances long term.

If you’re a spreadsheet nerd, using Excel or Google sheet is convenient and very straightforward. This way you don’t need to calculate everything manually. All you need to do is set up a couple of columns; asset and liability.  Here you list all the assets and liabilities you have in rows. Then you take a difference to get your net worth from the sum of the 2 columns. You’ll need to do this for every month and/or every year to get your net worth numbers. Then you’ll need to convert those monthly or yearly net worth numbers into a graph to see the trend over time.

This spreadsheet method is great because it’s easy and convenient. You can also estimate your future net worth using your current numbers. However, typing out and listing your numbers from different accounts is very labor-intensive especially if you have multiple savings, checking, and credit cards accounts. I don’t know about you but I don’t really like going to each website, logging in, and manually putting each number into my spreadsheet anymore. It takes me a long time to do that. Who has time to log in 10+ accounts anyway?!?

How to track your net worth an easy way

There is an easy way to track your net worth. I use an online platform called Personal Capital and I freaking love it. After tracking our net worth using a spreadsheet for years, I’m super pumped to use this tool because it’s very easy to use. It even tracks all of our transactions and spending. Everything is presented on interactive fancy charts. I don’t have to log in individual accounts, manually enter numbers, and make charts or graph anymore. I also used Mint for years to track our spending. In my opinion, I think Mint is good for budgeting. If you want to track your net worth and manage your investment accounts, Personal Capital is the way to go.

I’ve been using this new tool for a couple of years now, and I’m so excited to see our net worth going up little by little. Believe it or not, I log in Personal Capital every single day! It’s so addictive. This tool really motivates me to get our net worth up. Personal Capital not only tracks your net worth but also provides great tools for evaluating investment fees, predicting your portfolio and managing your budget. It even connects directly to Zillow to get Zillow’s Zestimate for your real estate properties. The best thing is that it’s totally FREE! Our net worth went up significantly after using it for just a year. I wish I would have found it sooner.

A screenshot of my Personal Capital showing our net worth trend***. As you can see, our net worth went up as time went by 🙂

A screenshot of my Personal Capital account showing the dashboard where I can see all of our financial accounts in one place, plus our cash flow + budgeting tool and more. How cool is that!

***Note: Our net worth is negative. The screenshots above are showing our net worth with our home value included. It looks like we came close to FI with a net worth of $733K. In reality, we’re not even close. This is the main reason I don’t include our home value into our net worth calculation. I include it in my Personal Capital account because I’d like to know the value of our home from time to time. By adding our home to my Personal Capital account,  I don’t have to open another tab and do some more typing to get my Zillow’s Zestimate. All of our assets and liabilities are there in one place.

If you never tracked your net worth before, I would recommend doing the old-fashioned way the first time; either the pen-and-paper method or the spreadsheet method. You will benefit by doing it from scratch. I know I did.

I didn’t realize that tracking net worth is so important if you want to build wealth. Before all this, I thought to be good at spending, budgeting, and saving were the only ways to build wealth. Tracking net worth can truly evaluate your financial health. So you can know how your finances are progressing over a period of time. I can’t express how much of an impact tracking our net worth has done for us. It has helped me get out of nearly $100k of debt and achieve financial freedom.

The importance of evaluating your net worth

It’s important to evaluate your net worth every now and then. So tracking your net worth is just the first step. Evaluating your net worth is another important step to help you achieve your financial goals. Don’t just track it and do nothing. One key way to evaluate your net worth trend is to monitor the change in your net worth over several years. This is a long and tedious process. However, once you start tracking yours, I promise it’ll be fun to do.

What are your financial goals? Do you want to get out of debt, pay off your student loans, pay off your mortgage, or build your dream retirement? By evaluating your net worth over time it can really help you achieve those goals. The change in your net worth over time is key.

If your net worth line is going up, that means you are getting closer to your goals. On the other hand, if your net worth line is going down, that means it’ll take longer for you to achieve your goals. You need to take a closer look at your liabilities and try to reduce it.

Evaluating your net worth over time can help you achieve your financial goals

It’s also important to evaluate your net worth in the context of your age and income. A net worth of $1 million may be remarkable for a 30-year old office clerk, but not so much for a 65-year old retired physician.

Here is a median household net worth by quintile published by the U.S. Census Bureau. A quintile is 1/5 of a group. So in this context, the top wealth quintile is the wealthiest 20% of households while the bottom wealth quintile is the poorest 20% of households. The top quintile includes older households and those with higher education and income.

Source: U.S. Census Bureau, Survey of Income and Program Participation, 1996, 2004, and 2008 panels

You should probably compare your net worth to the median in your age and income bracket. Net worth depends on age. For example, younger people haven’t had time to accumulate much wealth compared to older people. Other important factors in comparing wealth are income and education. The U.S. Census Bureau survey shows that a graduate or professional degree doubles the average net worth. Education helps you accumulate wealth because you increase potential income through higher paying jobs.

Ways to increase your net worth

1. Live below your means

It’s not rocket science. But living below your means seems to be the most difficult thing to do for most people. I can’t emphasize enough that the foundation to build wealth is to live below your means. A dollar saved is more important than a dollar earned. If you can change your lifestyle and live way below your means, you’ll see your net worth go up quite quickly. Learn to be a saver. Think twice before you buy anything.

If you spend more than you make, the difference lowers your net worth. On the opposite side, if you spend less than you make, the difference increases your net worth.

2. Get out of debt

If you have consumer debts, get out of it as soon as possible. Start tracking your expenses and begin creating your monthly budget. Paying interest on your debt balance is like throwing money down the drain. Set your mind and make the decision to get out of debt now. You can do it – you got this. We were a single-income family for a long time (half of our married life). We had nearly $100k of consumer debt! I still remember how terrible it felt to have that much debt. If I was able to tackle that debt in under 6 years with one income and a baby so can you.

Here is one simple key. Make sure that every month your debt is smaller than the month before.

3. Get a side hustle

Most people ignore the importance of getting a side hustle. We tend to think that having one (day) job is enough. Not only will a side hustle make extra money but it also makes you spend less money. Because you spend your time working on your side hustle. You’ll have less time to spend and more time to keep your mind focused on your hustle. Think about a side hustle you can do in your spare time or get a real part-time job.

Remember, a side hustle doesn’t need to be a real job. You can get extra cash just by using money-saving apps like ibotta, Ebates, Checkout 51 or Groupon. Or you can earn easy money in your spare time by taking online surveys from survey sites like Swagbucks, Pinecone Research, or Survey Junkie. These side hustles won’t make you rich or increase your net worth significantly. However, wouldn’t it be nice to earn a couple of hundred dollars every now and then?

My screenshot showing cash back I received from Ebates. You get paid when shop. Don’t leave free money on a table. Join Ebates today!

4. Reduce your housing and transportation expenses

Generally, the 2 most expensive expenses in your budget are your mortgage/rent and your car/transportation. You can be extreme by becoming homeless so you can cut your housing expenses down to $0. Your net worth will increase instantly. Or you can do nothing at all. But those are the most extreme from 2 ends. You don’t want to be homeless. Instead, you would want to do something so you can optimize your finances.

There are ways to reduce your housing expenses. Renters can try downsizing to lower their housing costs. Moving to a smaller place or getting a roommate to share your housing expense is a great way to save money. You can also lower your expenses by moving to a place with fewer perks and amenities such as tennis courts and/or pools if you don’t regularly use them.

If you’re a homeowner, you can regularly (like yearly) shop for cheaper homeowner’s insurance with reasonable coverages, reduce monthly utility bills, apply for all available property taxes reduction programs, move closer to work to keep transportation expenses down or move to a smaller house. Moving to a smaller house requires a lifestyle change but it definitely increases your net worth very quickly.

Remember, these are temporary. Once your net worth financially sounds, it makes more financial sense to have some luxuries.

Car payments are a big expense if you have one. An idea of having a new car (even buying a used car) every 4 or 5 years is not ideal if you want to build wealth.

Let’s do some calculations.

Say, you buy a used car with cash for $15,000 and have it for 5 years before getting the next one. That equals to $250 a month during those 5 years. There’re also other expenses like car maintenance, gas, and auto insurance that we didn’t take into our calculation. The cost of owning that car is more than $250 a month. Instead of buying a new car every 4-5 years, why don’t have it longer if you can? That way you don’t have a car payment all the time. Imagine if you didn’t buy your car with cash and had to finance it. The interest adds up with the cost.

Let’s do another calculation.

Assume, you keep that car for 10 years. Pretend you’d invest $250 a month when the 5th year is up (money that you would otherwise pay on a new car). At the end of the 10th year, you would have more than $18,000 accumulated (based on a 7% rate of return, $250 a month for 5 years).

Would you rather have a new car every 4-5 years or every 10-12 years? Imagine how much money you’d have in your investment account or an increase in net worth if you could keep your car longer and invest that money instead.

5. Go back to school

Are you in a dead end job? Or do you just feel stuck? If your answer is yes, then going back to school could help your situation. Getting a higher degree, a professional degree or just a certificate will increase your earning potential. I’m a firm believer in investing in yourself. You can do it while working full-time too. If you are thinking about going back to school, ask your human resources department to see if your employer offers any tuition assistance programs. Most universities offer online, night and weekend classes these days which makes it more convenient for full-time workers.

Never continue in a job you don’t enjoy.

If you are happy in what you’re doing, you’ll like yourself, you’ll have inner peace.

And if you have that, along with your physical health,

you’ll have had more success than you could possibly have imagined.

– John Carson

Do you track your net worth? If so, how do you do it?

If not, why don’t you try to start tracking your net worth today 🙂