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.