Why You Should Calculate Your Net Worth

Share Button

In today’s review of the first eight chapters of The Bogleheads’ Guide to Investing, I mention the importance of calculating your own net worth, and in the past I’ve mentioned how to calculate it.

But why is knowing your net worth important? What value does it have? Here are five reasons why you should calculate your net worth.

It provides a rule-of-thumb indicator of your overall financial health. This one number indicates your financial standing at the moment, for better or worse. How you interpret it is up to you.

It puts you in touch with all of your accounts. It’s a great way to regularly nudge yourself to check up on various investments you have and so forth.

Comparing your net worth to earlier net worth calculations lets you track your progress in a very concrete fashion. If you calculate your net worth every month, it can become a clear tracking of the state of your personal finances.

It’s a motivator. For me, it’s my primary motivator. Every single month, I work to make my net worth go up. This means keeping an eye on my spending, working to pay off my debts, and saving up over time for bigger purchases.

It’s easy. Once you’ve gathered up the basic information, you can calculate it in just a few minutes. Add up your assets, add up your debts, and subtract your debts from your assets. Done!

Now that you’re convinced that calculating your net worth is the greatest thing since sliced bread, it’s worth noting that your net worth value does have some drawbacks.

It’s very difficult to meaningfully compare it to someone else. There are so many variables in human life that comparing your net worth to someone else has very little value at all. How does your net worth compare to a child in Bulgaria, for example?

The raw number itself isn’t really all that meaningful – what matters is the change from period to period. Remember this if you are disappointed with your number, and work first on getting that percent change to a good place. If you do that, then you’ll be doing quite well.

Take some time today and calculate your net worth, then do it again in a month and see how it’s changed. You’ll probably be surprised – and you’ll also probably find yourself doing it each month because it’s a really interesting way to track your own progress.

Share Button
Loading Disqus Comments ...
Loading Facebook Comments ...

8 thoughts on “Why You Should Calculate Your Net Worth

  1. I calculated my net worth for the first time ever just recently. I had the figures for the beginning and end of 2006 and discovered that I was worth much more than I realised. Its too difficult to calculate more often (some of my accounts are postal) but calculating the change was eye opening.

  2. Love your blog! Networth is a great way to track how you are progressing towards your goals. I have been doing this twice a year for the last ten years. I just started using networthiq.com to track my networth.

  3. You left out one of the most important reasons, in my opinion: it forces you to look at your investments and asset allocations, to track performance, etc. for your financial assets.

  4. Hey Trent, I love your blog. I have a question for you. When doing net worth calculations, how do you (or will you) account for your house? In the month you buy your house, does your debt go up by thousands of a percent? Also, since in the early months of paying off the house, the principal goes down very slowly. So your debt will change equally as slowly.

    I ask because I’m going to close on a house later this month. I’ll have $165K in debt, and each month the principal will only go down about $200. So that’s like a decrease in debt of 0.12%. Hardly anything to get excited about.

  5. Bank of America’s new Portfolio feature lets you add all of your accounts from any financial institution. It even lets you add “manual” accounts so you can update ones that aren’t online.

    I agree with Trent that watching my net worth number rise, however slowly, is a huge motivator.

    Rick, that is how I handled my home purchase in my networth. I think it also motivates me to make extra principal payments. Although, Sometimes I do like to take out my “condo” account and my mortgage accounts so that I see a higher percent increase from month to month.

  6. Trent,

    Great article. You did a great job of expressing the importance of knowing your net worth as well as explaining the fact that it’s not so much the number that’s important but rather how it changes from period to period. This helps people understand that it’s all about the journey rather than the destination.

    Keep up the great work!

    Paul

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>