In basketball, the ball is passed rapidly, moving up and down the court and back again. Each team striving to score baskets earning their team points, and then the ball is on the move again. If not for the scoreboard it would be hard to keep track of which team has more points. Tracking your net worth is like your financial score board. Money is always coming in and going out, but if we don’t take the time to track it, it can be hard to know which side is winning- your assets or your debts.
Your net worth is simply your total wealth minus your debts. Figuring the numbers is as easy as fifth grade math. Add up the value of all your assets and then subtract the balance of your debts. The final number is your net worth.
One thing to remember is that assets are soft and debts are hard. Meaning that assets go up and down in value, while debts don’t. A debt obligation is always there until it is satisfied, paid off. True, as you pay debts down they do go down, but it remains a cashflow item to service until it is eliminated.
Your net worth is an indication of how you stand financially. Knowing this number helps pinpoint where you are on your financial goal timeline. It can also reveal weaknesses hiding within your spending plan. You need to know if your debts are growing faster than your income is increasing. If you’re just starting out it might be a good idea to track your net worth quarterly, but as you become more familiar with the process you should be running your numbers at least annually.
It’s quite simple to create a spreadsheet and list everything out, breaking it down into categories like money assets (cash and banking accounts), personal assets or use assets (your car and house), investments (stocks and retirement accounts), and liabilities. It’s very easy to track your net worth and definitely worth the effort.
It may seem a bit redundant; on the surface our finances might look just fine, but in a world of instant digital spending and special credit cards offered at every store you shop at, it’s easy to feel like you own more than you do. Remember that when something is on credit you don’t really own it until it’s completely paid off, until then it’s a debt. Tracking your net worth helps keep those things in perspective, showing you a truer picture of what you actually own, and what still belongs to the bank. If you are spending more than you make your net worth will decrease. The best way to increase your net worth is to consistently at the first save a percentage of your income, then pay off debts and other living expenses.
Managing your cashflow and tracking your net worth are two key steps in being in control of your finances. It takes the constantly shifting clutter of numbers and simplifies it to a single number giving you proper perspective. With that information you can make wiser decisions that will lead to the life, and ultimately, the retirement you really want, making you the winner in the game of finances.