Why You Should Track Your Net Worth

Earlier this week Ben shared a quick way to calculate your net worth and you might be wondering – why bother?

Knowing your net worth, and subsequently tracking its performance every month, quarter, or year, is a lot like knowing how much you weigh. By itself, it’s not particularly useful because you don’t have a relevant frame of reference. You could look up average net worth values provided by the Federal Reserve Board but ultimately you are unique.

Tracking your net worth is valuable because it gives you a quick snapshot of your financial picture in one easy number. When you track your net worth, it’s also important to annotate it to explain any significant changes. I’m sure a few net worths out there have seen some large fluctuations in the last year because of the stock market and it’s important to note that. Like your weight, it’s good to know you packed on a few pounds because of the holidays right?

It also lets you set goals and assess your progress towards achieving those goals. Whether it’s saving up for a vacation or saving up for retirement, tracking it along with your net worth will give you a better idea of how long that will take, whether you’re on track, and can even give you the confidence to work even harder.

Do you track your net worth? Are there any statistics you keep that are especially interesting?

Jim writes about personal finance at Bargaineering.com.

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  1. Extended-Warranty says:

    I don’t see the point of this, maybe I’m missing something. The financial problem that most Americans seem to run into is losing their job. When your home is on the verge of foreclosure, will telling the bank “I know my net worth” do anything?

    Everyone seems to be an expert on everything.

    • rjhancock says:

      Actually, it is very important. Until your net-worth is positive, you are in trouble of losing all you own. That’s the point that no one gets.

      A negative net-worth means you have more liabilities than assets to cover them. A positive one means more assets than liabilities PLUS something to leave behind (besides bills).

      • Lando242 says:

        But what is an asset? Is a job an asset? Stocks? Money you’ve load to someone else? How do you put a value on a job or something without a fixed cash value? How much is a favor worth? All of these can be lost in very short time frame. Houses and vehicles go through price fluctuation (mostly downward in the latter case), as does a lot of personal property. Your car might only be worth a few grand on the open market but it could also last you another 20 years. How much is that worth? The only true assets, some would argue, are precious metals, because even a state backed currency can falter. Net worth only gives you a general idea of whats going on and may not show the true nature of a problem or even if there is one. Net worth can flip around on you depending on the general market conditions and really isn;t that useful for anything other than pissing contests.

      • hills says:

        I agree – knowing your net worth is really important, even (especially!) if it is negative – though I disagree that anyone with negative net worth is in danger of losing everything…. Student loans & mortgage account for all of our liabilities, but with a high income and an in demand job, plus necessary life & disability insurance we are prepared if anything goes not as planned. Knowing our net worth helps give us realistic goals and we can track our progress and hopefully be positive in the next 10 years.

      • coffeeculture says:

        Basically my net worth is about -$200k now….I’ll end up paying down loans over 5 years but take out a mortgage…so my net worth is probably going to head south over a 10 year span even as i save for retirement.

        Is that useful to know? It’s not going to guide any decisions i’m going to make regarding how much i save and where my money is going. It’s already optimum.

        • Chmeeee says:

          Taking out a mortgage does not really substantially reduce your net worth (aside from fees and whatnot). Buy a $200k house, spend maybe $5k in fees and whatnot, but the $150-190k loan counts against the +$200k value of the house.

    • coffeeculture says:

      I will have a hugely negative net worth for at least the next decade or so… I’m in my early 20′s w/ ~$200k of student loans (8 years of school will do that). While I will have a high income, as my loans pay down, I’ll end up buying a house and taking on a mortgage.

      Couple this with the fact that I won’t touch my retirement money (even if I lose my job, knowing what I know now about non-recourse mortgages, I’d rather walk away, esp. if I’m under water)…my net worth is useless to me.

      I’m already being responsible in socking away $$ for retirement/general savings, paying down high interest debt first, and living within my means…my net worth is an oversimplification of the complex financial decisions & sacrifices I’ve made.

      • Sneeje says:

        Huh? Your net worth would include your retirement investments. Part of the point is to see how all of your savings activities are progressing compared to your debt. And yes, it will fluctuate over time, but the trend should be positive. So tracking your retirement is equally important to show that eventually you’ll be in the black when you retire.

    • Nigerian prince looking for business partner says:

      I think net worth, in itself isn’t terribly useful because it can fluctuate dramatically day-to-day due to market performance.

      But I do think it is a useful measure for setting financial goals and to determine if certain strategies are working. There are a lot of people out there who are in complete denial regarding their own financial health and never think about how their interest only credit card payments or $100/month student loan payments are really doing very little towards paying down their debts. When you don’t look at the big picture (where am I now, where will I be in 10 or 20 years?), it’s very easy to dip into your IRA to buy a boat, take on excessive debt, blow money on stupid stuff, etc.

    • usa_gatekeeper says:

      If a younger person doesn’t care about personal net worth, he or she might want to pay attention to his or her parent’s net worth. Starting 1/1/2011, the Estate Tax, which is repealed for 2010, will kick back in – big time.

  2. Lando242 says:

    Knowing your net worth IS a lot like knowing your weight, that is to say its worth less than most people think. So you say that your 25 pounds overweight? Compared to what? How much is muscle and how much is fat? What is your general state of health?

    Net worth is the same deal, its a gross oversimplification of a complex and varied issue. By that guys measure I have a net negative worth of about $3,500 because of my car loan, but I’ve also got a pretty much guaranteed source of income for the next 3-5 years (who else can say that with certainty? how much is that worth?).

    So what if your 25 pounds heavier than the next guy? The next guy could have a tapeworm for all we know. You have to look at the big picture and only seeing a corner of the puzzle isn’t going to reveal the whole thing.

  3. sonneillon says:

    So knowing my net worth let’s me know how broke I am. Unless they are going to pay off my student loans this isn’t going to change.

    • Nigerian prince looking for business partner says:

      You don’t do any kind of financial tracking or projections for the future?

    • JennQPublic says:

      Yes, knowing your net worth TODAY isn’t useful. But if you knew what your net worth was a year ago, you could compare it to today’s figure, and see if you’re moving in the right direction, and how far you’ve come. Which is why it might be worth figuring out today’s net worth, so you’ll have that data in a year.

  4. Coelacanth says:

    I’ve created a monthly budget spreadsheet in Excel, which I’ve also been tracking assets. Therefore, at the end of the month, I have a fairly accurate Net Worth figure. I can easily go back and watch progress over time.

    It does feel a little strange keeping retirement savings figures in there. Granted, I know they can be cashed out early (for a very steep penalty), but it’s not like I consider those assets to be “liquid” except for all but the most extreme crises… Then again, that might be the whole point.

  5. A.Mercer says:

    I started tracking my net worth a few years back. That was the turning point in my financial life. I saw that I was deep in the hole. I knew that if I lost my job or if something happened and I lost all or some of my income I would be in trouble. So, I started to increase my earnings, reduce my bills, and pay off my debt. About two years ago I crossed the line and the net worth figure in my spreadsheet was in black instead of red.

    The way I look at it, measuring your net worth is very important to getting yourself on the right track and staying there.

    • Coelacanth says:

      I crossed that line this month. Very happy after seeing it so deep in the red over the last few years!

    • heliotrpic says:

      Congratulations! I look forward to the day that I’m in the black. At a modest pace of paying off debt I’m about a year away from being there myself.

  6. shinseiromeo says:

    Absolutely agree with the article. I’ve been using Mint for a while. Use it to keep track of my spending and to make sure I’m charged correctly from business. It’s invaluable to me.

  7. rpm773 says:

    The best way to start to lose weight or to maintain a weight is to get on the scale at least once a day. It may be depressing at first, but you eventually start to internalize getting on the that scale every morning, and start making choices the rest of the day to make that experience less negative and more positive.

    The same can be said about checking your net worth. In this economic climate, or if you’re younger and just out of school, it’s not a lot of fun. But when tracking it on a regular basis and caring about what it is, you start making financial choices with it in mind. And that can greatly improve your situation.

    • denros says:

      The difference is of course, anyone can lose weight if they simply eat less or exercise more.
      “But anyone can increase their net worth if they just make more or spend less!” Try telling that to someone whose boss hasn’t given them a raise in years, does all the freelance work they can find, is unable to find anything that pays better AND is as thrifty as possible. I know people in this situation! There are some cases where you either have to relocate, get different education or switch careers. THAT is surely not as simple and straightforward as losing weight.

      • Nigerian prince looking for business partner says:

        Of course there are always extenuating circumstances. But the reason to check your weight or to give an assessment to financial well being is to be honest with yourself and fight denial about how big of a hole you are in. It’s very tough to improve conditions if you a) don’t know where you are at financially; or b) don’t know where you’re going.

        Of course everyone is different. Some people would respond negatively to knowing how bad things are, while for some people it would be beneficial to see this, while having a 5 or 10 year plan to get out of it.

      • rpm773 says:

        I’m not generalizing that building net worth, or pulling yourself out of negative net worth situation, is as easy as losing weight. Everyone is different, and has a different situation.

        What I’m saying is the first steps in both losing weight and building net worth are comparable. You take regular measurements. You begin to think about your goals, and how your day-to-day activities affect how quickly you achieve those goals. Then you begin to make decisions on what you learn about yourself.

      • Coelacanth says:

        I’ll bite. There are also individuals who in good faith do all the “right things” – eat a healthy, balanced diet, exercise more, and eat less – and they might not enjoy the same weight loss that most people might. Perhaps they have a genetic condition that makes the body store calories whenever it can, or some disease whose complications or which *successful* treatments contribute to or cause weight gain. (There are many such condiitons out there – many quite common, not just the popular “glandular” excuse many blindly throw out there.)

        Furthermore, some people may have to rethink their entire lifestyle in order to simply “eat less and exercise more.” Many social activities involve going out to eat and are sedentary endeavours. Many people sit on their posteriors all day for their job. It could mean having to find new friends and forgo activities they once loved. They may face resistance from their families, signifiant others, and friends (after being labeled a “health nut”) – all which potentially make it psychologically difficult to make material changes.

        As so with the jobs. Sometimes what’s holding people back from a career change *is* purely psychological, instead of seen from a purely objective point of view. There are others for whom it’s simply not possible.

        In my opinion, the analogy holds.

  8. RickN says:

    I’ve tracked my net worth for years using Quicken. I handle all the day-to-day family finances and the long-term retirement planning, so I feel better knowing how I’m doing.

    I’ve also shared the info with my kids over the years. I’ve wanted them to see that money for a big vacation or a new car doesn’t just “happen” to show up in our bank account.

  9. rage says:

    what a bunch of crap.

  10. nytom1 says:

    I’ve done this for over twenty years. Monthly in the beginning, quarterly later on, now just semi-annually. It is a very useful tool for indentifying where things are going right or wrong. I’ve found that most people I know who are critical of this approach are those having financial problems and don’t really want to see what it reveals. I’ve always been very debt conscious and I find it keeps me focused to see the total debt number decreasing.

  11. nytom1 says:

    I’ve been doing this for over 20 years and it’s always been useful for me. It really helped to identify areas of strength and weakness in my finances.

  12. crazydavythe1st says:

    I’m a college student in school without a job. I don’t even want to think about this…

  13. savvy9999 says:

    Since I replied heartily to the first post, I’ll reply again to this one.

    I check my worth every 3 months, and have done so since 2004. Put it on a spreadsheet, with the last 3 rows showing % change from previous quarter, previous 1/2 year, and previous year.

    The post is absolutely correct, values on their own mean little (and can be discouraging) but the ever-so-slight increase in value from time period to time period mean a lot psychologically. Sure we could afford every nifty thing under the sun if wanted to; we don’t have iPhones or Droids or data plans on our old, shitty flip-phones; we don’t have a single LCD/Plasma/HDTV in the house (still waiting for our big ol 10-year-old trusty Sanyo TV to die, it won’t). I had an iPod, it broke last year and I haven’t gotten another one. We’ve had 2 kids, sunk some money into value-producing (and enjoyable) home projects, gone on a couple of much-needed, sanity-saving vacations. But month after month we’ve not splurged much, paid down debt and added to savings. In 4 years our net worth has gone up by 168%.

    I guess what i’m saying is that our worth spreadsheet does much to make our rather unsexy finance decisions all worthwhile. If you don’t see progress, it doesn’t feel like progress.