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Tracking and Growing Your Net Worth

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Knowing your net worth answers a few juicy questions:

  • Can you afford that beautiful house you spotted on Zillow?
  • Are you on track for retirement?
  • Can you quit your job and travel the world for a few years?
  • Are you part of the 1%?
  • Are you worth more than your peers?

Sure, these questions are self-indulgent. But knowing where you stand helps you determine if you’re on track or not.

For a few years, I kept tabs on my networth by periodically checking my main bank accounts and adding them up. When my finances were simple, that was more than enough.

Life does have a way of getting more complicated and my finances are no exception.  These days, there’s too much going on for me to easily calculate my net worth on my own. Now I use tools to calculate everything for me.

Before we get into all that, let’s go over the basics of tracking your net worth.

How to Calculate Your Net Worth

The basic definition of net worth is your assets minus any liabilities. Calculate your net worth in just three basic steps:

Step 1: Add up all your assets

First, you’ll want to make a list of everything you own. This should include the big ticket items, such as your home, your car, any retirement accounts you may own, investments, and savings accounts. When you’ve listed the value of all your assets, add it all up.

Step 2: Add up all your liabilities

Next, you need to make a comprehensive list of everything you owe. Liabilities are all your “debts.” This list should include things like student loans, your mortgage, car loans, medical bills, and credit card balances. Again, tally everything up.

Keep in mind that calculating your net worth is different than figuring out your monthly budget. For example, for net worth, you want to use your total credit card balance instead of the amount you owe on a monthly basis. Instead of listing out your monthly car payment, write down the total amount you need to pay off.

Step 3: Subtract liabilities from assets

When you have the total figures for your assets and liabilities, you simply subtract your total liabilities from your total assets. The final figure is your net worth.

Net Worth Calculation Complications

In theory, all this is simple. Add up assets, then deduct liabilities.

The main problem you’ll run into is trying to figure out the exact worth of some assets. How much do you value the portion of a private business that you own? Is your car really worth $10,000? Will someone really buy your house at that price?

Some asset valuations will be a judgement call. This is to be expected. My advice is to be conservative when the valuation is subjective. That way you won’t be caught off guard.

How to Project Your Net Worth

If you’re planning a big purchase or retirement, you’ll want to know what your net worth will be by a certain date.

While you can certainly create your own spreadsheet and do the math to predict how various assets will grow over time, there are plenty of online calculators that make projecting your net worth fast and easy.

For example, this future value calculator lets you plug in the interest rate, periodic deposits, and number of periods for an investment.

The personal net worth app Imfingo also offers a free future net worth calculator so you can estimate how your assets will grow as time passes.

Remember to be conservative with net worth projections. The stock market doesn’t always grow at 8% per year. Build in some margin of error in case assets don’t increase in value at the rate you want them too.

How to Grow Your Net Worth

Tracking and growing your net worth helps you stay in control of your finances. If you’re like most people, your goal is to increase your wealth while paying down your debts. This helps you improve your standard of living while ensuring a stable lifestyle in your retirement.

To grow your net worth, here are four ways to make it happen.

1. Start investing early 

The earlier you start investing, the more time your money has to grow. Investments aren’t just for the wealthy. On the contrary, you don’t need a big budget to get started with investments. Additionally, your 20s and 30s can be a great time to invest, as you’re less likely to have the expenses of a mortgage, kids, or a spouse.

One of the easiest ways to get started with investing is by participating in your company’s employer-sponsored retirement plan. In many jobs, you’ll see this in the form of a 401(k), which lets you contribute tax-advantaged money each month. In many cases, your employer will also match your contributions up to a certain amount. Do whatever it takes to max out the company matching, that’s free money that’ll kick start your investment.

Even if your budget is tight, get started. Even if you only contribute $50/month to your investment account, it’ll make a huge impact on your retirement. Time matters more than anything else with investing.

2. Pay down your debts 

The average American now carries around $38,000 in debt. For most people, about 25 percent of this is credit card debt. If you have too much debt, it’s important to work aggressively to pay it off.

A common mistake people make is sticking to minimum monthly payments on their credit cards. If you do this, you quickly end up on a hamster wheel of debt while your interest continues to increase the total amount you owe. This keeps you in debt for the long haul, which makes it difficult and sometimes impossible to grow your net worth.

You can start chipping away at credit card debt by making more than the minimum monthly payment. As soon as you can, get to a place where you can pay off your cards in full each month. That’s one of the first major steps to growing your net worth.

For example, if you pay just $20 a month toward a $1,000 credit card balance at 18 percent interest, it will take you almost eight years to pay off your card. This is a huge drag on your net worth.

3. Create an emergency fund

Just 40 percent of Americans have enough savings to cover a $1,000 emergency. This means the other 60 percent aren’t prepared for an unexpected car repair, medical bill, or other sudden expense. Instead of accessing an emergency fund, they may be forced to use a credit card.

This can lead to debt, which lowers your net worth. By having an emergency fund, you can rest easy knowing you won’t have to go into debt to cover a surprise expense. Get 3-6 months worth of living expenses in your emergency fund so that surprise expenses don’t put your net worth in jeopardy.

4. Cut spending ruthlessly on things you don’t care about

While being frugal is one option, we prefer conscious spending.

This means cutting expenses to the bone for things that you don’t care about while spending on things that truly matter to you.

For example, I don’t get any joy from buying new clothes. I buy basic t-shirts, socks, underwear, one pair of shorts, and one pair of jeans each year. Every few years, I get a new hoodie. That’s it. But I also spend extravagantly on travel and eating out. You might decide to do the opposite. The points is to spend in areas that truly matter to you while cutting out stuff that doesn’t.

Not only does this make you a lot happier since you’re buying stuff you love, it typically frees up room in your budget for saving and investing.

Yes, you’ll be happier and you’ll grow your net worth faster.

Tools and Apps For Tracking Net Worth

There are a variety of tools and apps out there to help you with tracking and growing your net worth. Even better, many of these tools are free.

Personal Capital is a free app that gives you tons of advanced features for tracking your net worth. It’s the tool that I personally use, it’s by far the best out there.

There’s one major downside though, you will get hounded with sales calls. It’s understandable, they need to make money somehow. But if you want to avoid those calls, make sure you put in a fake phone number.

Mint offers another tool for tracking your net worth. However, it tends to be more budget focused, so you might not get as many features as you will with Personal Capital or another app.

Net Worth Averages By Age Range

When I first calculated my net worth, the next thing I wanted to know is how I compared to my peers. Am I ahead? If so, how much?

Or… am I behind?

Net worth averages will give you a rough idea on how you’re doing.

Keep in mind that most people save far too little and aren’t prepared for retirement. So I wouldn’t consider “average” to be “good,” it’s more like the bare minimum.

According to the Federal Reserve, the average net worth for families is:

  • Under 35 years= $76,200
  • 35-44 = $288,700
  • 45-54 = $727,500
  • 55-64 = $1.06 million

To put this path in context, let’s assume you follow the average exactly, retire at 64, and plan to use the 4% safe withdrawal rate to make your money last as long as possible.

The 4% safe withdrawal rate is a good rule of thumb that allows you to live off the interest of your investments without withdrawing the principle. In theory, it means your money will never run out.

If you followed this rule and got your net worth to $1.06 million by the time you turn 64, you’d be able to spend up to $42,400 per year during retirement. Based on your living standards and goals, that might be enough for you. If not, make sure your net worth is growing at a fast enough rate to get where you want to be.

Why Your Net Worth Matters

Seeing your net worth gives you a snapshot of your overall financial health. Ultimately, it determines the quality of our retirement.

It’s not the only thing in life that matters but it is one major hurdle that we all need to overcome in order to enjoy our golden years. My advice is to make sure it’s on track for the lifestyle you want to live, automate everything so you don’t have to worry about it, then focus on other areas of your life.

One last thing, your net worth will bounce around. One market crash or real estate bubble and your net worth will take a huge hit on paper. This hit is temporary. Markets come back and so will your net worth. As long as you don’t panic and sell during the turmoil, everything will work out.

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1 Comments

 
  1. avatar
    Clemente Corwell

    Just 1 question though, do you reall think that it still matters we make the right decisions where necessar?