Let’s start with giving a definition of net worth. After all, we can’t determine it’s inherent value if we can’t measure it. Net worth is defined as:
Net worth = assets – liabilities
So if you owned a house (an asset) worth £200,000 with a mortgage balance (your liability) of £100,000, you’ve got £100,000 in net worth. Of course, you might not just have a house as an asset. You can include all your savings, your pension, investments at that point (S&S ISA, mutual funds, bonds, crypto etc) and additional properties. You could also include assets such as vehicles, jewellery and furnishings.
What’s the point?
Now that we know how to calculate our net worth, is there much point doing it in the first place? What is the net worth of tracking your net worth?
If your financial net worth is your assets minus your liabilities, it could be likened to weighing the positives against the negatives. So let’s do that!
If you have debt you want rid of, determining and tracking your net worth is a great way to reach this goal. Knowing the balance and interest rates of each of your liabilities can help to set a priority for which one to pay down first.
Long term goals such as being financially independent or retiring at a reasonable age are clear goals and as such need clear milestones. Tracking your net worth is the ideal way to make sure you’re on target.
Seeing how close your goals are can be an emotional boost and entrench the behaviours needed to get there.
Just like a budget, it can give perspective on spending. Knowing which assets are more important to you can help you reassess which liabilities to pay off or assets to buy.
If you have lots of different types of assets or liabilities, it might be difficult and time consuming to pool the data for an all encompassing calculation.
Knowing the value of your net worth could give you that “keeping up with the joneses” feeling, where you compare your worth to others too much. Personally, I only check my net worth against my progress to my long term goals.
Speaking of comparisons
Let’s be honest, I was clutching at straws with those negatives.
In my eyes, the positives of valuing and tracking my net worth far outweighs the negatives. Being able to quantify my net worth and compare my progress month on month gives me accurate dates to those big financial questions in my life.
When will I pay off my mortgage? When will I retire and with how much? When could I feasibly buy my own island?
OK, maybe not that last one. But you catch my drift.
Which tracker to use
There’s plenty to choose from, with varying degrees of depth and functionality. With the advent of “open banking”, new products started popping up allowing you to collate data from many of your accounts, even with different companies. YNAB, moneyhub or yolt just to name a few.
If you don’t want to sign up for anything, why not make one yourself? With the formula provided, some time and an excel sheet you can get the same level of detail, if not more.
My solution lies somewhere in the middle. I’ve found an extensive Google sheets net worth tracker here. It’s got some pretty funky graphs, is entirely free and has separate tabs for things like financial independence and investments.
Thanks for reading and happy tracking!