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The Importance of Tracking Your Net Worth

July 1, 2015

Have you ever considered that spending $100 on an item in February and receiving $100 from a friend in October means that you’ve basically broken even when it comes to your wealth? We often look at our money on a day-by-day basis, forgetting that our past spending is affecting our future gains and, therefore, our overall wealth.

Without a doubt, one of the best ways to gauge the health and performance of your financial life is by tracking your net worth. What is net worth? It’s the total of all of your assets (cash, investments, real-estate, etc) minus your liabilities, such as debt.

The reality of our money is that it’s always either increasing or decreasing, and we often make incorrect assumptions. Someone living with little income and low expenses but living paycheck-to-paycheck could think that they’re getting poorer, but they might forget that they’re steadily contributing to a 401K at work, causing their net worth to increase over time. However, a person who brings in $200,000 a year with an ever-growing credit card balance and owning pricey, gas guzzling cars might be steadily losing their net wealth over the long-term.

Since January 2014, we began hardcore debt-crushing, which then led to heavy saving and investing. I was pleased when I saw this trend reflected in our You Need a Budget Net Worth report:

Screen Shot 2015-06-29 at 5.07.40 PM

See the drop during Christmas? Between holiday shopping and a friend’s wedding, we actually thought that we were “breaking even” during that time, more or less. We paid our credit cards in full and didn’t empty our checking account, but we did take money out of another account to pay for the planned expenses. At the time, we didn’t truly consider what this spending meant towards our overall net worth.

This sort of data is even more crucial when we begin making larger financial decisions such as buying homes or vehicles. Cars, for instance, will continually take a hit to your net worth. They continually lose value and cost you money in maintenance and fuel. A house, too, can easily cause your net worth to drop significantly. Many people like to think of houses as “investments”, but it’s only a good investment if it’s causing your net worth to increase over the long-term. Pumping $10,000 into home improvements during the first year and getting $5,000 from selling it in a down market 5 years later is obviously a loss, but it’s very easy to forget this when the money is spread out over the course of a few years. This is why net worth tracking is so important.

Here’s where things get interesting. Net worth is most useful when tracked over the long-term. Like watching stocks, it’s not really best to look at small patches of time. Here’s a look at our money flow over the course of April. Not so pretty, right? We lost around $2,000!

net-worth-small

However, if we zoom out and look at the graph over the course of several months, it paints a much different picture:

net-worth

Now that’s more like it! A steady increase in our net worth over time through consistent saving and investing. This graph can teach us quite a lot about our finances. If ever we take a look at a long-term trend of declining net worth, ALL HANDS ON DECK! WE’RE LEAKING MONEY AND NEED TO MAKE CHANGES!

Hopefully, this gives you an idea of why net worth tracking is key to becoming a true guru with your money. At a glance, it can easily tell you whether that investment has really been worth it, or better yet, if you’re truly on your way to financial independence.

How Do I Track Net Worth?

Our favorite way to track our net worth is through Personal Capital or You Need a Budget (YNAB). While YNAB gives you a great view of your cashflow (see the graph above), Personal Capital tracks your investments and real estate as well, giving you a full view of every piece of your financial life. We link up each of our accounts, and it shows a nice graph displaying our net worth over time.

We can’t recommend Personal Capital highly enough. Not only does it help us track our net worth, but using their Fee Analyzer woke me up to the fact that we were getting ripped off by a financial advisor via crazy fees! If you’d like to open a free account, click the link below* (affiliate link).

Start using Personal Capital (free)

*Affiliate disclaimer – if you sign up using the link above, we make a small commission that comes directly from Personal Capital. It doesn’t cost you a penny. This helps us keep the blog running smoothly. We also truly love using Personal Capital, and would never recommend it to you unless we firmly believed that it could help you with your finances. Thanks for supporting us! 

 

 

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  • http://mymoneycounselor.com/ Kurt Fischer

    I agree! In the end, net worth matters most. Tracking it captures everything–paying off debt, boosting income, winning the lottery, etc.–in one neat package.

    • http://savemoneydammit.com Save Money, Dammit!

      So well put, Kurt! Thanks for stopping by and taking the time to comment!

  • http://www.AdamChudy.com/ Adam

    I try to look ours over monthly. Definitely keeps you honest and points out any real leaks in the boat.

    • http://savemoneydammit.com Save Money, Dammit!

      Definitely! A monthly checkup works well to keep an eye on things without having to worry about the daily fluctuations. Thanks for stopping by and commenting!

  • http://www.moneybacon.com MoneyBaconGuy

    People who track their Net Worth are awesome. The way I see it there are four steps to be content in the long-term. Follow these steps to success.
    1. Budget, make a spending plan.
    2. Net Worth, track it up to twelve times a year.
    3. Retire, live comfortably on your lifetime earnings.
    4. Bacon, you deserve to have what makes you happiest.
    Knowing your Net Worth over time is the fastest way to illustrate your future success, financially. By doing a budget and saving money your success is only a day away.

    • http://savemoneydammit.com Save Money, Dammit!

      Love it! Some fantastic financial wisdom wrapped up in 4 awesome steps. Thanks for stopping by and commenting!

  • Jeff

    I couldn’t agree more! Net worth tracking is what actually helped my realize that I was in financial trouble and needed to curb my spending habits.

    financethehighlife.blogspot.com

    • http://savemoneydammit.com Save Money, Dammit!

      That’s awesome! It definitely gives you a great overview of your finances. Even with good budgeting and saving, there’s always valuable data that can be pulled from tracking net worth.

      Thanks for stopping by and commenting!

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  • Zech

    Just so you know, the referral link for Personal Capital isn’t working. http://track.flexlinks.com/a.ashx?foid=1069289.201450&fot=9999&foc=1&foc2=562898