How To Track Your Net Worth And Why It Mat­ters


Abby Ryan has painted a new paint­ing ev­ery day for the past eight years. I learned about Abby from Seth Godin, who has pub­lished a blog post ev­ery day for the past 6,000 days. Al­low me to add my story to their amaz­ing ex­am­ples of ded­i­ca­tion and per­se­ver­ance. I’ve tracked our net worth since 2003.

It started just be­fore my wife and I up­graded to a big­ger home. As a large home is apt to do, it came with a brand new jumbo mort­gage. Scared straight by the big loan, I cracked open a spread­sheet and started record­ing num­bers. It wasn’t al­ways pretty.

At first, ris­ing home prices made our net worth fat­ter than a tick, as my mom would say. Then came the Great Re­ces­sion. It’s no fun watch­ing both the value of in­vest­ments and a home evap­o­rate at the same time. Make note of that the next time a fi­nan­cial ad­vi­sor asks how you’d re­spond to a 20% de­cline in the stock mar­ket. The bet­ter ques­tion is how you’d re­spond to a 20% drop in stocks, a 20% drop in home val­ues, un­em­ploy­ment at 10%, and the fi­nan­cial sys­tem tee­ter­ing on the edge of obliv­ion. But I di­gress.

Hav­ing stuck to our in­vest­ment plan, we’ve been re­warded over the past sev­eral years. Home val­ues are up, and the stock mar­ket has re­bounded more fiercely than the Round Mound of Re­bound.

Let’s be clear. Track­ing your net worth is the eas­i­est, most im­por­tant step you can take to im­prove your fi­nances. Here’s why and how to do it.

Why track your net worth?

Net worth is the sin­gle most im­por­tant fi­nan­cial met­ric one can track. It’s more im­por­tant than a per­son’s salary or monthly bud­get. Why? It rep­re­sents the sum to­tal of your en­tire fi­nan­cial life, re­duced to a few num­bers. It shows you all of the as­sets you’ve ac­cu­mu­lated over your life­time. It shows you all of your cur­rent debts. The dif­fer­ence be­tween the two is your net worth.

To re­ally un­der­stand the power of net worth, it’s im­por­tant to see how it re­lates to a monthly bud­get.

Each month, for most peo­ple, in­come brings money in and ex­penses send money out. For those who make more than they spend, the dif­fer­ence adds to their net worth. The dif­fer­ence my re­sult in an in­crease to a savings or re­tire­ment ac­count. Al­ter­na­tively, the dif­fer­ence may go to pay down credit card, stu­dent, auto or other debts. Ei­ther way, net worth goes up.

For those who spend more than they make, the dif­fer­ence low­ers their net worth. It may re­sult in a de­crease in savings or an in­crease in credit card debt. Again, ei­ther way, net worth goes down.

The point is that net worth is the fi­nan­cial score­board. It shows your day-to-day and month-to-month progress on a grand scale. It’s also very easy to track.

How to track your net worth

A net worth state­ment is sim­ply a list of as­sets owned and debt owed. For most in­di­vid­u­als, it should eas­ily fit on a sin­gle page. To track your net worth only two de­ci­sions need to be made: (1) what should be in­cluded in the net worth state­ment; and (2) what tools, if any, should one use. Let’s look at both of these.

For pur­poses of mon­i­tor­ing your fi­nances, it’s not nec­es­sary to in­clude lit­er­ally ev­ery as­set you own. I in­clude all fi­nan­cial ac­counts (e.g., check­ing, savings, in­vest­ments, re­tire­ment ac­counts), real es­tate and busi­nesses.

I do not in­clude per­sonal prop­erty, such as ve­hi­cles or fur­ni­ture. Many peo­ple in­clude the value of their ve­hi­cles, in part to off­set the im­pact of hav­ing car loans. I don’t in­clude ve­hi­cles or other as­sets that de­pre­ci­ate over time. All debts are in­cluded on the state­ment.

Most as­sets are easy to value. Two po­ten­tial ex­cep­tions are real es­tate and busi­nesses. My ap­proach is to be very

con­ser­va­tive on the val­u­a­tion. For real es­tate, I use Zil­low’s zes­ti­mate. I’ve found that it un­der­val­ues real es­tate. When you fac­tor in the costs of sell­ing real es­tate and po­ten­tial tax li­a­bil­i­ties, how­ever, it’s rea­son­ably ac­cu­rate.

As for tools, there are sev­eral free and low-cost op­tions. The first is a spread­sheet. A sim­ple Google Sheets spread­sheet is a great way to track your net worth.

There are also sev­eral au­to­mated tools to track your net worth. Some of the more pop­u­lar op­tions in­clude Mint and Per­sonal Cap­i­tal. These op­tions not only track your net worth, but also pro­vide ex­cel­lent tools for eval­u­at­ing in­vest­ments and man­ag­ing your bud­get. Per­sonal Cap­i­tal also en­ables you to con­nect di­rectly to Zil­low to track the value of real es­tate. How to eval­u­ate your net worth Track­ing your net worth is just the first step. It’s also im­por­tant to eval­u­ate the re­sults from time to time. One key way to eval­u­ate the re­sults is to mon­i­tor the change in your net worth over time.

There are any num­ber of im­por­tant fi­nan­cial goals. Com­mon goals in­clude get­ting out of debt, sav­ing for re­tire­ment and buy­ing a home. Mea­sur­ing the change in your net worth over time en­cap­su­lates each of these goals into a sin­gle, easy-tounder­stand met­ric. If you use a spread­sheet to track your net worth, cre­at­ing a chart of your progress is as easy as this ex­am­ple chart shows:

It’s also im­por­tant to eval­u­ate your net worth in the con­text of your in­come and age. A net worth of $1 mil­lion may be im­pres­sive for a mid­dle-aged teacher, but not so im­pres­sive if you hap­pen to be LeBron James. A quick and easy way to make this as­sess­ment is to use Money Ra­tios.

The con­cept was pop­u­lar­ized by Charles Fer­rell in his book Your Money Ra­tios: 8 Sim­ple Tools for Fi­nan­cial Se­cu­rity

at Ev­ery Stage of Life. The book walks through how much one should be sav­ing and have saved based on in­come and age. For ex­am­ple, to be on track for re­tire­ment, at 35 you should have saved 1.4 times your in­come. In other words, for those mak­ing $75,000 a year at age 35, they should have $105,000 saved for re­tire­ment.

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