I’m a big believer in using one’s net worth as a quick assessment of personal finance health. A person is making a good move if they calculate their net worth every month or every quarter, then compare that net worth to where it was at a year ago or, if they have the data, five years ago (or even more). The further back the data goes, the clearer your financial progress becomes.
A quick aside: you can easily calculate your net worth by adding up the value of all of your assets – your bank accounts, your retirement accounts, your home’s value, your car’s value, etc. – and subtracting all of your debts from that – your mortgage, your student loans, etc. It doesn’t take long at all provided you have all that information at hand.
Still, your net worth provides only a small part of the overall picture. While it represents your financial state, it does not represent all of the value in your life.
Your net worth does not represent your health. You have the physical and mental ability to take on lots of things in life. Because of your physical and mental health, you can take on more work and earn more money, but just as importantly, you can take on many challenges that life hands you.
Your net worth does not represent your relationships. You have family members and friends with whom you have deep personal ties. A good friend can help you when you’re down and be your most powerful supporter when you’re charging ahead. A good family member is someone you can turn to any time you need a little boost in life.
Your net worth does not represent your freedom of choice. Every day, you can choose how to spend your time. You can choose who to love. You can choose almost everything about your life. What you do is up to you, and that’s a powerful asset to have.
Your net worth does not represent your time. Hand in hand with choice is time. Every day that passes is filled with hours that you can use in a multitude of ways – some good, some bad. It’s an incredibly valuable resource, but it’s one that isn’t directly represented in anyone’s net worth.
Your net worth does not represent your talents. All of us have skills and talents and things we’ve learned that we can bring to the table. Some of us are exceptionally skilled at certain things, but you would never know it from looking at a balance sheet.
Our lives are full of elements that aren’t properly assessed in our net worth when we look at that net worth as a standalone number.
So, is net worth still a useful number? Absolutely. If you draw on all of these assets that are not on your balance sheet, you can unquestionably raise your assets and lower your debts because of the actions you take.
Use your physical and mental health to work a little more and bring in a little more income.
Tap your relationships for spending advice and professional advice and work with some of those people to save money by purchasing things together and sharing tools.
Use your freedom of choice to make more sensible purchases and back away from the less sensible things you can do with your money.
Use your time in a way that results in an improvement of yourself, not just in ways that fill the hours or bring minor pleasure.
Utilize your talents to open opportunities and strengthen relationships in your life.
All of these things are assets that we have, but we have to use them in order to see any impact on our net worth. In that sense, our net worth is, in part, a reflection of all of those assets. We can’t directly see the time or the relationships we have when we look at that number, but we do see how those things have impacted our lives.
Whenever you feel like your financial state is troubled, step back and look at the other assets you have. You have a ton of assets that you can draw upon to help fix up your financial state. The only question is whether you’re going to use those assets to help yourself or whether you’ll just let them wither on the vine.