Why is tracking your net worth needed for your finances?
Net worth is the most important financial indicator that people can track. It is more important than a person’s salary or monthly budget. Why? It represents the sum of your entire financial life.
Simply put, net worth is the difference between what you have and what you owe. If your assets exceed your liabilities, your net assets are positive.
Conversely, if your liabilities are more significant than your assets, your net assets are negative.
Therefore, your net worth is a macro way to measure your overall financial situation.
If you calculate today’s net worth, you will see the final result of everything you have earned and spent so far.
Tracking your net worth will help you manage your personal finances better.
Exactly How to Calculate net worth?
As mentioned, net worth shows you all the assets you have accumulated in your lifetime and all your current debts, and the difference between these two equals your net worth.
Your assets are any valuable things that you have that can be converted into cash. It includes investments, bank and brokerage accounts, retirement funds, real estate and personal property (vehicles, jewelry, and collectibles)—and of course, the cash itself. Intangible assets such as your private network are sometimes considered assets.
On the other hand, your liabilities represent your debts, such as loans, mortgages, credit card debts, medical bills, and student loans.
One of the challenges in calculating your net worth is to assign accurate values to all of your assets. When valuing certain assets, conservative estimates are essential to avoid exaggerating your net worth.
For example, your house may be your most valuable asset and can significantly impact your financial situation.
Determining the exact value of your home—by comparing it with similar houses recently sold in your area or consulting a qualified real estate professional—can help you calculate the actual net worth.
However, it is worth noting that there are some debates about whether personal homes should be regarded as assets for calculating net worth. Some financial experts believe that your house’s market value should be considered assets because these values can be converted into cash when they are sold.
However, other experts believe that even if the homeowner does get cash from the sale of the house, the money must be used to buy or lease another home.
Of course, if the value of the home sold is higher than the value of the replacement house, part of the value of the old house can be regarded as an asset.
Why is net worth essential?
Tracking your net worth over time is a valuable indicator of your financial stability. People work hard to take their salary home. However, what will happen after your salary reaches your bank account is unpredictable.
Looking at your net worth can help you understand where your money has gone in the past and where you hope it will come and go.
When you try to decide your next financial move—whether it’s buying a car or buying a house, paying off debts and returning to school, or reaching a new savings goal—knowing your net worth can help you understand the big picture. But it may not help you stick to your daily budget.
How to track net worth
It is usual for net worth to fluctuate. Platforms such as Personal Capital and Mint allow you to choose to link all accounts. This includes checking, savings, money market, CD, and retirement accounts, so you can easily track your net worth.
You can also link and view your debts, making it easier to find motivation and stay on track while paying off debts.
Whether you are red or black, our goal is to be honest, and understand your position.
Viewing your net worth statement over time can help you determine where you are and how to get where you want to go.
Besides the platforms, the followings are essential tips about tracking your net worth:
Spend money wisely
Understanding your net worth is necessary as it helps you find areas where you spend too much money. To prevent unnecessary accumulation of debt, please consider whether you need or want something before buying.
To reduce unnecessary expenses and debts, your needs should account for the majority of costs. Remember, you can mistakenly rationalize demand to need.
Paying all the debts
Reviewing your assets and liabilities can help you develop a plan to repay your debts. For example, you might earn 1% interest in a money market account while paying off credit card debt with 12% interest.
You may find that using cash to pay off credit card debt makes sense in the long run. If in doubt, please calculate the numbers carefully to see if it makes financial sense to pay off certain debts while considering the impact of no longer getting cash.
Saving and investing
Your net worth status will encourage you to save more and invest. If your net worth statement shows that you achieve your financial goals as planned, you can continue what you are doing. Conversely, suppose your net worth offers room for improvement. In that case, it can provide the motivation you need to take a more active approach to save and invest.