Once your monthly budget becomes routine you may begin to think about larger financial goals like paying off your student loans and saving for retirement. As your financial savvy continues to improve you might wonder: how do I compare to others? Am I on track? What does my big financial picture look like?
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One of the simplest and most revealing financial metrics you can track is your net worth. Net worth is defined simply as your total liabilities or debts (mortgage, car loan, student loan balances, etc.) subtracted from the total value of your assets (cash, property, personal belongings and valuables, investments, etc.). Often in our financial lives we’re only focused on our day to day expenses, happy if we earn more money than we spend every month. Calculating your net worth allows you to step back and see the big picture, giving you a valuable new perspective. Rarely does someone reach their financial goals accidentally! Including a net worth statement in your regular financial review gives you an easy metric to reflect on your overall progress.
How to Create a Net Worth Statement
Think of a net worth statement as your big picture financial report card. Your statement can be as simple as a brief document or spreadsheet that lists all of your assets and all of your liabilities, and then sums up your total net worth – here’s a simple example using our new Net Worth template:
Your net worth statement can be super fancy and compare numbers month over month (or year over year), calculate percentages, or include specific savings categories, giving you additional data and insights, but it’s probably best to keep it simple at first.
3 Reasons Why Net Worth Matters
1. Get Clear On Where You Stand
The high level overview of a net worth statement should give you a clear image of where you stand financially. Are you in the + or – ? Reviewing your numbers regularly forces you to be honest with yourself about the progress you’re making toward your goals.
It isn’t possible to stick your head in the sand when the numbers are laid out clearly for you every month. Has your credit card debt grown? Have you paid your student loans at a slower pace than anticipated? Are you on track to retire when you want? Is most of your wealth tied up in home equity? Using this tool helps give you a clear picture of your financial health, and you should start to see patterns and progress allowing you to glean insights as you continue to re-calculate your net worth statement over time.
2. Better Communication about Finance in Relationships
If you have a spouse or partner with whom you’ve combined finances, the net worth statement can also be a wonderful communication tool. Regularly reviewing your shared net worth summary with your partner can help you stay on the same page and talk together about shared financial goals. You’ll both be able to clearly see the progress (or lack of progress) you’re making together toward your goals. This can be especially helpful if one partner is the ‘bookkeeper’ in the household because the net worth statement avoids any of the complicated details and periodically gives both of you a big picture review.
3. Challenge Your Financial Assumptions for Better Success
A net worth statement can also help you challenge some of your ingrained assumptions. If you really want to get out of credit card debt, but can’t seem to make significant progress, seeing your credit card balances listed on your net worth statement every month may be all the motivation you need to cut out a few luxury expenses or reconsider one of your costly habits. Your net worth statement can also be very inspiring. Saving money and paying down debt can feel incredibly slow and unrewarding, but your net worth summary should clearly illustrate your progress over time and help keep you motivated.
Get Started With Tracking Your Net Worth
If you’ve never calculated your net worth, we encourage you to give it a try, stepping back and looking at the big picture may be a very revealing exercise! Try out our new Net Worth template today!