When is the last time you got a physical examination at the doctor’s office?
Do you remember the routine you went through once they called your name? Chances are, the routine probably consisted of measuring your “Vitals” and assessing your overall health.
The doctor-nurse team most likely checked your blood pressure, had you step on a scale and listened to your heart amongst other things. But could you imagine halfway through your examination telling the doctor,
“Doc, I am not interested in getting on that scale or putting that cuff around my arm, I don’t really care about my weight or if my blood pressure is high.”
Sounds pretty dumb right?
While our physical health is certainly more important than our financial health, taking a financial health inventory several times a year isn’t a bad idea. And that starts with knowing your net worth.
In fact, if you’re not aware of your net worth, chances are you’re neglecting your financial health (Net worth worksheet at the end of the article).
Have awareness – know your networth.
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Sticking with the health analogies, wouldn’t having awareness where you could stand to improve your health be something you would like to know?
For example, if your doctor said something along the lines of, “Be sure to manage your stress better and eat less fried food,” you would most likely take their advice.
While not everything an expert like a doctor says is what we want to hear, having awareness does have some benefits. For starters, awareness causes us to:
- Shed light on areas that need improvement
- Take action in those areas
- Reflect and learn from past experiences
This is exactly why tracking your net worth is vital to making sure financially you’re on target to hit your savings goals for retirement and live a lifestyle you enjoy.
Just like knowing the exact routine you need to improve your health, knowing your net worth will hopefully instill a hunger to do things to increase it!
What is net worth anyway?
Simply put, your net worth is the combination of what you own (Assets) and what you owe (Liabilities).
To quickly figure out your networth, simply add up all your assets and liabilities, then subtract the two. For example, if you had $100,000 in assets and $75,000 in liabilities, your hypothetical net worth would be $25,000.
Typical assets include:
- Home (Market Value)
- Car value
- Investments (Retirement, 401k, Stocks, etc)
- Insurance Policies
- Cash in accounts
- Personal property like jewelry or art
Typical liabilities include:
- Mortgage debt
- Auto debt
- Student debt
- Credit card debt
- Other debts (Lines of credit, RV’s, Boats, financed home goods)
While taking out a piece of paper and a pen, or hopping on Excel is just a few ways for tracking your net worth, there are other automatic options such as Personal Capital or even Mint that will help you too.
But besides awareness, why is tracking your net worth so valuable in the first place?
5 Quick Reasons to Know Your Net Worth
According to Brian Meiggs, the founder of My Millennial Guide, “Knowing your net worth can help you track your path to becoming wealthy and financially independent.”
Here are 5 quick reasons to know your net worth:
1. Increase in Your Financial Action
Recently I read that the number one characteristic most super successful and productive people possess is that they take action. They don’t have to be perfect – they just do something.
What typically incites action is knowing why you need to. Seeing your net worth, big or small, should motivate you to start taking action. Even if that means you stop comparing yourself financially, which is just one trick to increasing your net worth.
2. You’ll Stop Spending So Much Money
Tracking your net worth will place value on growing your net worth, instead of spending money on things that really don’t matter.
We have all experienced buyer’s remorse from buying things we don’t really want or need. It is a lot easier to avoid making silly purchases when we have an overarching goal in mind.
The first step in increasing your net worth is to stop spending, so you have extra cash to throw at your debt!
3. Pay Off Debt
There are two ways to increase your net worth if you really get down to it:
- Pay off liabilities
- Increase your assets
Either way $1 towards your debt or $1 towards your investments increases your net worth by $1.
So after you get your spending under control and you have some extra income, you can start knocking out your debt.
Start with small amounts of debt that are easy to knock out, thus increasing cash flow. Once you pay off your debt (outside of your home) then you can really start focusing on saving/investing and letting your net worth grow with compound interest!
4. Save More!
Once you get your money under control and you pay off your debt, now you can start saving and investing like crazy.
You can start by setting up an emergency fund that is at least three months of your fixed expenses. Make it a “Zombie Proof” emergency fund and be sure to house it in online savings account like Ally – separate from your checking.
5. Increase Earnings
Whether you decide to ask your boss for a raise, start a side business or just fill out some surveys here and there for $50, knowing your net worth should help motivate you to go create more money!
The three basic components of a healthier financial situation are:
- Spending less,
- Saving more, and
- Making more
The last being the one most will fail to focus on because making more money is typically perceived as more challenging in nature. That being said making more money is essential to increasing your net worth – especially if you’re playing catch up.