The primary reasons to track your net worth is to get information so that you can meet your financial goals. Just as your doctor needs to know your blood pressure, weight, glucose and cholesterol level to determine your overall health, your net worth is a sign of your overall wealth.
The reason I keep track of my net worth is not to make myself feel good about how much money I have. Worst, it’s certainly not to make myself feel bad when the investments go down. It is simply to obtain information on whether the value of funds or real estate is going up or down. Moreover, this information can help your next steps to increase wealth.
Basics
Net worth is the sum of all your assets minus the sum of all your liabilities. Assets include retirement fund, brokerage account, bank account, real estate equity, personal properties such as jewelry and cash or cash equivalents such as gold and bitcoin. Liabilities include credit card debts, student loans, mortgage balances, and auto loans.
You can track your net worth on apps like Personal Capital on daily or weekly basis. However, I recommend you do it on a spread sheet over time to see the trend.
How Often
It is recommended that you keep track on monthly basis. Depending on your individual need, you can track your net worth quarterly, bi-annually or yearly.
What to Include
You can include anything that is of value to you. If you have a collection of art or collectable cars that are worth significant amount of money, by all means, include them. I don’t include things that depreciate like cars but it’s your net worth so you make the rules.
I read you shouldn’t include your primary residence. I include it since it has a value. Knowing whether my primary home is going up or down is pertinent since the primary reason for tracking net worth is for information.
Reason #1 to Track Your Net Worth: See the Trend on Retirement Fund
Tracking the trend of your retirement fund over time (monthly, quarterly, bi-annually, or yearly) will give you a clue as to whether it is going up or down. If you notice a sustained downward trend while the S&P 500 has been going up, your portfolio may need a little more attention.
Reason #2 To Track Your Net Worth: Determine Whether You're on Target for Your Retirement Goal
By assessing the total value of your retirement fund year over year, you can determine how close you are to your goal. Using the Rule of 25, I knew that I needed $1.5 million to get $5,000 for monthly expenses in order to retire. Seeing my retirement fund grow over time put me at ease that I was closer to my goal each year.
Reason #3 to Track Your Net Worth: Change Investment Strategy if You Don't Like the Result
In the early 2010, I didn’t like the result I was getting on my retirement fund portfolio. It was on an upward trajectory but wasn’t performing as well as I liked. Since I had over 15 years before retirement, I decided to allocate more into stocks and less into bonds. As a result, I got better result. While I believe in investing for the long term, I also know that I’m the one ultimately with control. Tracking the value of my retirement through calculating my net worth enabled me to make a sound choice.
Reason #4: To See the Trend on Real Estate Investment
How to Calculate the Value of Real Estate Investments
First, determine the current property value. You can search your property on Redfin or Zillow to find the estimated value. Minus your mortgage from the current estimated value to see what the property is worth. Essentially, it is the equity on the house.
By knowing the value of the house through net worth tracking, you can achieve our financial goal as it related to real estate. I would recommend you have an end goal for each property you own. Options include: hold forever and pay off the mortgage, sell with profit and fund retirement, hold and leave it for your kids.
Reason #5: Determine When It's Time to Sell or Buy More Properties
Let’s say that your end goal was to sell your primary house when the equity increases by $250,000. You understand the principle residence exemption of capital gains taxes on the first $250,000 if you are single and $500,000 if married. You would know the optimum time to sell by keeping track of your real estate net worth.
Similarly, if your equity has been on a downward trend, you would know that it’s a buyer’s market and the time is right to buy additional properties.
The real estate market doesn’t transition from a seller’s market to a buyer’s market over night. You can get prepared to sell or buy sooner by keeping close tabs on the worth of your properties.
Reason #6: Monitor Debt and Loan Pay Down
Tracking net worth also involves making an assessment of your liabilities. Set a goal to pay off your highest interest debt. This is usually your credit card debt, followed by the student loans, followed by your mortgage. Before you can build on your assets, you should pay off your highest interest debt first.
If you pay off your credit card balance each month, that is your monthly expense and not debt. You don’t need to track this as debt on your net worth.
Reason #7: To Keep You Motivated
Net worth tracking will give you the confidence that you’re on the right track when you see an upward trend on retirement fund, brokerage accounts and savings account. Similarly, witnessing a Witnessing the downward trend of your debts and loans can keep you motivated into paying them off quicker.
I’ve been tracking my net worth for the last 10 years and here are the results:
- Changed my investment strategy for higher growth
- Surpassed my retirement goal of saving $1 million
- Purchased four real estate investments at the right time
- Sold two houses for a profit
“What gets measured gets managed.”
-Robert Sharma