Do you know your net worth? That’s how much is left after subtracting your debts from the total value of your cash and assets.
At first glance, figuring out your net worth may seem pointless. You’re probably not going to bump Warren Buffett or Bill Gates from their spots on any “World’s Wealthiest People” list anytime soon. And more importantly, from a biblical perspective, building wealth isn’t our primary financial objective.
Still, here are three reasons why monitoring your net worth can help you manage money better.
1 – Your net worth doesn’t lie
In our culture, it’s easy to convince ourselves, and others, that we’re doing better with money than we are. We can finance nice cars, pay for the latest fashions with plastic, and even “buy” a more expensive home than we can afford. But our net worth tells it like it is, and that can be a very helpful financial wake-up call.
In the personal finance classic, “The Millionaire Next Door,” authors Thomas Stanley and William Danko draw an important distinction between people who look wealthy but aren’t (they call them, “Big Hat, No Cattle”), and those who don’t look wealthy but are (where the title of their book came from).
There are many people in the first group—not so many in the second.
Ask yourself: Do I look wealthier than I am, or am I wealthier than I look?
2 – Your net worth shows whether you’re making progress
To be sure, there are other ways to define your life and determine whether you’re moving forward. Tallying your net worth each year, however, and monitoring the trend that develops, can be very helpful. If you’re going to build a nest egg large enough to support your family in your later years, you’ll want that trend to be moving in an upward direction.
Earning more each year and increasing your standard of living may make you look and feel like you’re getting ahead, but an increase in your net worth will show if you actually are.
3 – Your net worth helps you pinpoint financial issues
Each time you calculate your net worth (a natural time to do so is at the end of each year), don’t just retain the bottom line number. Keep the pieces and parts.
On the asset side, track the value of your home (Zillow will give you an estimate), your retirement savings, other savings, the value of your car(s), and other assets. Then look at changes within each line item.
With your household’s retirement accounts, don’t just record the balance. Also record how much you contributed each year and how much your investments earned. Of course, how much you contribute is much more under your control than the returns you earn. Still, the earnings side is important as well. If you see year after year of meager returns, it’s probably time to re-evaluate your investing process.
On the liabilities side, track how much you owe on your house and other debts, such as vehicle and student loans (Read Breaking the Cycle of Financing Vehicles). This annual exercise will provide a helpful reminder to perhaps put more focus on getting out of debt or make sure you’re on track to be mortgage-free at least by the time you retire.
How much net worth should you have?
“The Millionaire Next Door” has an interesting way of defining “wealthy.” Whereas many people think of someone who has a net worth of $1 million or more as wealthy, Stanley and Danko’s definition provides more of a level playing field for people across the spectrums of age and income: multiply your age times your annual pretax household income from all sources and then divide by 10.
If you have that amount or more, you have a low-consumption, high-wealth-building lifestyle and you’re considered wealthy for someone of your age and income. If your net worth is much less than that, you’re probably consuming too much of your income and investing too little.
Take it to heart: “Be sure you know the condition of your flocks, give careful attention to your herds.” – Proverbs 27:23
Take action: Download and print the financial net worth form here, then figure out your net worth.
Read more: Rethinking the Net Worth Statement