On this episode of How To Money, Matt and Joel discuss the importance of calculating and keeping track of our financial net worth. They break down why it’s a useful snapshot of our personal finances, how to calculate our own net worth (and some handy software that can do it for us), and most importantly, how to build it up over time. Often, if we want to determine how well we’re doing financially, we look at things like our paychecks or yearly income, or the things we’re able to buy. But that’s not the best indicator of how well we’re doing – a big paycheck every two weeks doesn’t mean much if we’re spending it all. “You’re only getting a part of the picture,” Joel says.
Calculating net worth isn’t very hard: Add up what’s in your savings account, what’s in your retirement and any other investment accounts, and the value of things you own like houses or businesses. If it’s worth less than $5,000, it probably doesn’t need to be included. Then subtract any debts you have: Car notes, mortgage payments, credit card debt, and student loans. The final number is your overall net worth. Of course, this number can fluctuate in big ways depending on the market; and it’s important to consider if taking on some debt now will contribute to your net worth over time. For example, taking on $50,000 in student loan debt to get an MBA will negatively affect your net worth in the present, but the degree can enable you to get a higher-earning job with more opportunities to invest, raising your net worth in the long term.
There’s also a big difference between your overall net worth and your liquid net worth. The median net worth of an average American is $100,000, but they point out that this is usually tied up in home equity, which is money that is hard to access. Knowing your liquid net worth – that is, the money you can actually get your hands on easily – helps give us a solid idea of how well we can respond to financial shocks or opportunities. Usually, as long as you’re spending less than you’re bringing in, and investing that difference wisely, your net worth – liquid and otherwise – should go up consistently over time. And at some point, your money will start working for you harder than you’re working for it, meaning you have achieved financial independence – or, as Matt likes to call it, nirvana. Hear all this great information for getting your personal finances in order on this episode of How To Money.
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