In the world of personal finance, there are many buzzwords and phrases that get thrown around. One of the most common ones is “tracking net worth.” You may have heard financial experts or friends talk about the importance of tracking your net worth, but what does it really mean? And why does it matter?
In this article, we will dive deep into the concept of net worth: what it is, how to calculate and track it, and why it is crucial for your financial health. We will also provide a step-by-step guide on how to track your net worth effectively. So let’s get started!
What Does Net Worth Mean and How Can I Calculate It?
Net worth is a single number that represents the value of everything you own, less everything you owe. It is essentially a snapshot of your financial situation at a given point in time. In other words, it is the sum of your assets minus your liabilities.
Assets
Assets include anything that you own or have invested in that generates income. This can include cash, bank accounts, brokerage accounts, retirement accounts, IRAs, personal capital, home value, collectibles, investment accounts, real estate, stocks, bonds, and even alternative investments such as domain names and cryptocurrency.
Liabilities
On the other hand, liabilities are your debts. Some of your debts may be secured by your assets, such as your mortgage or car loans. Other debts may be unsecured, such as credit card debt, student loans, and lines of credit.
To calculate your net worth, simply subtract your total liabilities from your total assets. The resulting number is your net worth.
Why is it Important to Track Your Net Worth?
Net worth serves as a critical measure of your total financial health, much like blood pressure readings signify physical health.
Understanding and monitoring your net worth can significantly impact your personal finances and financial goals for several reasons:
Indicator of Overall Financial Health
Just as the median net worth provides a helpful initial benchmark for financial health on a broader scale, tracking your net worth over time can give you an accurate measure of your own financial progress.
Aids in Accurate Investments and Goal Setting
There are no set ‘ideal’ net worth values to tick off life’s significant milestones. However, understanding your net worth can help guide financial decisions. For instance, it’s often recommended to limit real estate to 35% to 50% of your net worth.
By keeping track of your net worth, you can calculate your affordable home value or decide when to allocate funds towards a savings goal.
Uncovers Progress of Invisible Investments
Net worth can make intangible investments more visible. By assessing your net worth, you can gauge your investments’ performance and the contribution each investment makes to your overall wealth.
Enables Continuous Growth
Tracking your net worth over time illuminates how your financial decisions impact your financial growth, enabling you to make necessary adjustments for continuous upward movement. After all, wealth is the wind in the sails of your financial dreams.
A Comprehensive Guide to Monitoring Net Worth
This segment offers a detailed, step-by-step guide on various strategies to calculate and keep track of your net worth, ranging from traditional balance sheets to modern automated financial planning tools.
1. Catalog Your Assets and Liabilities
The calculation of net worth hinges on the totality of your assets and liabilities and the difference between the two.
Amassing this financial data might require some time initially. It’s beneficial to compile all your data in one location for organization and easier reference later on.
Which brings us to the next step – selecting a method of tracking that augments this entire process.
2. Opt for Your Preferred Net Worth Monitoring Method
Several options exist when it comes to devising a system for net worth tracking.
The first is the traditional method via an Excel spreadsheet.
While spreadsheets are a reliable tool and widely used, they require manual entry of data. Every time there’s an update or change in your financial status, you need to input these changes manually, which can be time-consuming and susceptible to human error.
Yet, spreadsheets might be an ideal choice for those seeking extensive customization and control over their net worth tracking process. Moreover, spreadsheets can provide a physical backup for those who prefer an offline method of managing their net worth.
An alternative could be a spreadsheet template explicitly designed for net worth tracking. These templates are generally equipped with custom fields for eased data entry and automated processes to detect errors and provide net worth calculations.
Budgeting apps such as Mint and You Need a Budget can also calculate your net worth, but may be limited in tracking complex assets and liabilities such as cryptocurrency.
3. Input Your Assets and Liabilities into Your Net Worth Tracker
This is perhaps the biggest selling point for using a software-based tool for tracking net worth: automation.
With a spreadsheet, you’ll need to repeat this step every time you wish to update your net worth. The more frequently you want to check your net worth, the more time you’ll spend manually entering assets and liabilities.
This is where software like Kubera shines — they offer automation. You can link all your credit cards, bank accounts, financial accounts, and even crypto accounts to a unified dashboard. This automated platform ensures all your assets and debts are captured and included in your net worth calculation.
For continual updates, Kubera users can add individual crypto and stock market tickers, enabling them to keep an eye on the market and make informed financial decisions.
4. Consistently Track Your Net Worth Over Time
Regular tracking of net worth is crucial to understand your progress towards your financial goals and when to reassess any of your investments.
Manual entry into spreadsheets might make it challenging to maintain motivation for regular net worth checks.
This is where automated tools like Kubera shine. Not only does it make tracking easy, but it also presents data in visually appealing charts. These custom charts offer a clear picture of asset allocation, investment performance, and, most importantly, the growth of your net worth over time.
Wrapping Up
In conclusion, understanding and keeping tabs on your net worth is an essential part of managing your personal finances. This process involves cataloging assets and liabilities, selecting an appropriate tracking method, inputting this data into your tracker, and continuously monitoring your net worth over time. With the evolution of software-based tools, this task has been significantly simplified and streamlined. By consistently tracking and analyzing your net worth, you can make informed financial decisions, adjust your strategies as needed, and chart a steady course towards achieving your financial goals.
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