This post is part of The One Hour Project, in which you can spend just one hour to put your finances in a better place without a big lifestyle change, through frugality or other financial choices.
One of my best motivational tools for staying on a good personal finance track is my own personal net worth calculator. I use it constantly to keep tabs on my own financial moves and to make sure I’m constantly spending less than I earn and also constantly reducing my debt load.
A few months ago, I wrote a very detailed description of how to actually set up a net worth calculator on your own computer for free using a spreadsheet, so I won’t repeat it here – if you’re interested, you should use that tutorial – it is one of the best things you can do in an hour to keep yourself motivated to get ahead financially.
Instead, I’m going to address some questions about building and maintaining a net worth calculator.
How often should you calculate your net worth? After trying several patterns, I have found that the most useful pattern for me is to calculate it midway between paychecks. So, let’s say you’re paid every two weeks on Monday – you should calculate your net worth on the Monday when you’re not paid. If you’re paid weekly, calculate it on a weekday as far from payday as you can. If you’re paid monthly, calculate it two weeks or so away from payday.
Why does this method work? Most people have a money flow where their checking account balance spikes on payday, then gradually goes down until the next payday. By calculating net worth regularly on a schedule that accounts for that money flow, you can more clearly see progress over time instead of seeing a lot of peaks and valleys.
What should I include as an asset? This is something that many will argue about, but I generally suggest that you include an estimate of the value of your house, the blue book value of your cars, and anything exceptionally valuable that can be resold that you own. Obviously, all of your account balances should be included, too.
What’s the real benefit of doing this? Every single pay period, make it your goal to increase your net worth. Ways of doing this include paying down debts (there won’t be an immediate effect from this, but the long term effect will be great as you’re not paying interest), looking for methods to earn more money, and perhaps most importantly, spending wisely. The calculator, if done consistently, is both a great motivator and a great way of keeping track of long term progress.
Even better, once you’re consistently increasing your net worth each period, you can set more goals: a certain percentage increase each period, for example. If you keep doing it over and over, you will reach a state of financial freedom, guaranteed.