Net Worth: What It Is and Why It Matters

Net Worth-What It Is and Why It Matters

Monitoring your personal finances is not always the most straightforward, simple task. There’s a credit card balance here, a student loan there, a raise you’re not sure made much of a difference, and a mortgage that you haven’t tracked since the day of the closing.

You might be on top of your bills each month, but are you fully aware of the state of your overall financial picture? Are your finances improving with each debt payment or are you staying stagnant?

Setting financial goals based on the life you want to create for yourself is essential, but goals have little impact on behavior and outcome if you don’t commit to one important step: tracking your progress.

This is where net worth comes into play.

What is net worth and where do you stand?

In the simplest terms, net worth is your assets minus your liabilities. The leftover number, which could be negative for some, is what would be leftover (or what you would still owe) should all of your assets be applied to your debts.

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To calculate your net worth, list all of your assets including the equity in your home and vehicles as well as the money in your savings accounts, investment and retirement accounts. Next, list all of your debts — secured debts such as your home and car loans and unsecured such as your credit card debt. Add up column A (your assets) and subtract from this column B (your debts). This is your net worth.

If you want to see how your number compares to the averages across America, TIME offers a startling breakdown. You’ll see, for instance, those between the ages of 35 to 44 are at $35,000 including home equity and $14,266 excluding home equity. With experts pushing for a year’s worth of salary saved for retirement by age 30, this group is obviously behind the recommended levels.

Why does net worth matter?

When you’re looking at your assets and liabilities as separate line items, it can be hard to determine how healthy (or unhealthy) your finances actually are. If instead, you calculate your net worth and see your bottom line number, it can put everything into perspective – especially if that number is inching farther and farther into the red.

Once you get into the habit of tracking your net worth on a regular basis – say once a quarter – you are able to see if your finances are trending in a positive direction or if things aren’t moving the way they should. For some, net worth tracking can be a powerful wakeup call, pushing them to make changes they wouldn’t have otherwise known were so imperative to make.

Say, for instance, your investments are underperforming, leading to a drop in your net worth. Or, you notice the car you purchased is losing its value at a staggering rate or your home is now worth far less than what you owe on the loan. Tracking your net worth can help you pinpoint where the problem areas lie and what you can do to fix them.

Think of net worth as a starting point.

Calculating and monitoring your net worth is a great place to start paying closer attention to your finances and a generally simple way to determine how healthy your overall financial picture is. It’s an excellent tool for checking in on the progress you’ve made towards reaching larger financial goals like saving for retirement or your child’s college education. But it still is just one tool in your arsenal.

Your net worth provides an overall snapshot of where you stand, but it can’t replace the smaller, day to day tracking of your finances. This smaller scale tracking is what can tweak your habits before negative decision-making can pack a big punch to your net worth.

It’s about being mindful of where your money is going, how your decisions are impacting your future, and understanding exactly how you can take charge of your overall financial health.

If you want to get started tracking your net worth, check out a few of these useful tools:

CNNMoney’s Net Worth Calculator
Personal Capital Net Worth Management
Net Worth Tracker

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