If I had to give one piece of advice to help improve your financial situation, it would be to track your net worth.
Not knowing your net worth is like spending your whole education and career learning how to play football but not knowing how to keep score. Earning money from your career is playing the game, but your net worth is how you keep score. Your net worth is THE number that best explains your financial situation.
Net worth is defined as follows:
Net Worth = Assets – Liabilities
Basically, everything you own minus everything you owe. It’s pretty simple to create a spreadsheet to calculate it. I think going through the exercise of manually creating the spreadsheet is a great way to connect with the value in your accounts. I recommend setting a calendar reminder to update it at least once per year, or after your initial spreadsheet using an online tool like Mint, Personal Capital, or Wealthfront. I believe that “numbers that are watched improve”. Once you are aware of your net score and tracking it, you will consciously and subconsciously make better choices to improve it!
Note that debt counts negative towards your net worth. So if you’re in debt, and you’re itching to start investing, remember every dollar of debt you pay off increases your net worth. It also provides a guaranteed return of paying less interest and removes risk as well. Pay off the debt, and increase your net worth!
If you want to be a millionaire, then you need to know your net worth! Being a millionaire means having a net worth of over $1M. Start tracking, and get that number up there! Send me a message when you’re a millionaire! :)
Here’s how to do calculate your net worth
- Open up Google Docs
- Create a new Google Spreadsheet and name it “All Accounts / Net Worth”
- Create three columns: Account Name, Account Type, Balance
- At the top list every single financial account to your name with a positive value (savings, checking, 401k, Roth IRA, investments, stock, bitcoin, etc)
- Then list every big asset that you own (house, investment property, car, etc). Don’t bother with stuff smaller than a car.
- Then list every single DEBT that you have: credit card, student loans, car loan, mortgage, medical loans, personal loans, etc. Make sure to list the balances as NEGATIVE numbers… debts count against your net worth.
- Then at the end SUM UP the “Balance” column to learn your net worth!
It should look something like this:
Some net worth FAQs
- Q: Should I count my house even if I still owe money on it?
A: Yes, count the value of your house as an asset, and the balance of the mortgage as a debt. The difference (the equity you have in your house) counts toward your net worth. - Q: Should I include the value of my car?
A: Yes. I would use Kelley Blue Book or a similar pricing service to get an approximate current value. As with a home, make sure to count the balance of a loan as a negative if you have a car loan! - Q: What other assets should I include?
A: It doesn’t need to be a perfect accounting of everything you own. I’d say don’t worry too much about stuff smaller than a car. But if you have fine art, jewelry, or anything else worth over $10K, I would add it there. - Q: Should I add the value of my small business?
A: I probably wouldn’t for this exercise, as small businesses can be difficult to value and are very illiquid. If you do sell your business one day, then you can add the proceeds and your net worth will shoot up!
As always, reminding you to build wealth by following the two PFC rules: 1.) Live below your means and 2.) Invest early and often.
-Jeremy
