Do You Know Your Net Worth?
Figuring out your net worth can help you see exactly where you stand financially. But tracking it is even better.
By tracking your net worth you can get a more accurate picture of how you’re doing financially. While your day to day finances fluctuate, your net worth gives you a steady overview of where you stand and if you’re heading in the right direction.
In today’s podcast you’ll learn how to figure out your net worth, ways you can improve it, and how to use it to improve your finances.
Your action task for this week is to figure out your net worth.
I highly recommend Personal Capital. Set up is super
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Below is the transcript from today’s show. Or you can download the full transcript as a PDF.
Hey there! This is Natalie Graham with the Go From Broke Podcast, where I teach you how to take control of your finances so you can stress less and save more. Today, we're going to talk about net worth. What it is. Why you need to know it. How to figure it out. And why tracking it can actually improve it. So stick around. When you hear the term net worth, you may think that only applies to rich people. But really net worth is just a way to get an overall picture of your finances. Figuring out your net worth may take a little effort, but it's well worth it. First, you need to figure out all your assets. That's things like cash in your bank accounts, investments, your retirement accounts, also any tangible assets like your house, car, jewelry, that sort of thing. Next you'll need to tally up all your liabilities. That's any debt you have --credit card, student loan, mortgage, car payment, et cetera. Once you've got those numbers, you can figure out your net worth simply by subtracting your liabilities from your assets. So why is knowing your net worth even important? Well, a lot of us are familiar with our income and if you've been budgeting, maybe you have a good idea of your day-to-day expenses. But our day-to-day spending is fluid. And even if you're tracking everything, you're still only really seeing part of the picture. For example, let's say you've got a typical month with your normal expenses. You're budgeting for those and adding some extra to savings, but then the next month your car needs some work. So you spend $500 more than you expected, and you can't add anything to savings that month. You may feel deflated and defeated by that expense. But if you look at your net worth, you may also notice that it didn't actually impact your overall finances that much. Tracking your net worth is a way to see the big picture and make sure, regardless of fluctuations in your daily spending and your earnings, you're actually headed in the right direction. So what if your net worth is actually negative? If you've been working hard to get your finances in order, seeing a negative net worth can be like a gut punch. But don't worry. A negative net worth just means you owe more than you own. I know that sounds scary, but it doesn't necessarily mean you're in trouble. Your net worth is a snapshot in time. So a negative net worth is just a reflection of where you are right now. Maybe you have a large student loan or your investments are suffering a downturn in the market. Typically a negative net worth won't affect your day to day finances, but it will help you see where you need to focus to make the biggest impact on improving things. Paying off high interest debt will improve your net worth the fastest. Not only will you get rid of a compounding liability. You'll eventually have more to put towards savings to build up your asset column. Now that you've got a snapshot of your current financial picture, what do you do with that information? Well, by itself, it's kind of just a novelty number. But if you make a habit of tracking your net worth, you can actually learn a lot. First, you can make sure you're trending in the right direction. Like I mentioned earlier, unexpected expenses can make it feel like the rug is being pulled out from under you. But you may be surprised to see your net worth isn't actually impacted. In some cases you may have investments that more than cover those expenses, but since they're separate from your spending accounts, you don't even realize it. At the same time, if you notice your net worth trending downward, you can take steps to correct whatever's causing it. You may be vaguely aware of the debts you have based on your monthly payment, but tracking your net worth will let you see clearly how much you owe and to whom. It'll also help you see if your debt payoff strategy is working, or if you're doing something to undermine it. You may think your net worth would go up because you're gradually paying down your student loan, but if you're racking up consumer debt at the same time, it'll show in your net worth. Tracking your net worth is also one of the best ways to keep focused on future savings via your investments. If you're a natural spender, like I am, it can be tough to set money aside for the future. Even if you're putting some money into savings, if you're not investing it, your net worth will be stagnant. After you've tracked your net worth for a little while, you can see how much things are moving and whether it'd be a good idea to move some savings into investments. There are a number of investment vehicles out there, but the most common is the stock market. While there's no guarantee the market will go up, historically long-term investments return around 7 to 9% annually. You may have some downturns, but historically investing in the market is one of the fastest ways to grow your net worth. Another great reason to track your net worth is that it will help you make more informed spending decisions when it comes to the big expenses, like buying a new house. Your net worth is predominantly a way to track your progress towards your longer term financial plans. So if you're tracking it and you can see at a glance what impact a large purchase might have on those plans. Finally tracking your net worth is also a great way to see what sort of progress you're making towards your financial goals and to help you set new ones. For example, if you are looking to buy a new house, maybe you see, oh, my net worth probably isn't sufficient for that right now. Well, you can set that as a goal and start saving up for it. And tracking your net worth, you'll be able to see the kind of progress you're making. All right. So what are some ways to increase your net worth? Your net worth is a pretty
simpleequation-- assets minus liabilities. That means to improve your net worth you need to make the assets number higher and the liabilities number lower. So let's start with some ways you can increase your assets. First reduce your expenses. Between impulse spending and recurring monthly expenses, most of us probably have a good chunk of money that we can reclaim if we get more intentional with our spending. If you're struggling with knowing where your money is going, take a listen to episode 001 for some help. Second increase your income. There's only so much spending you can cut before life starts to get uncomfortable. Instead of depriving yourself of everything fun, see if there are some ways you can actually increase your income. If you have a traditional job, maybe you could ask for a raiseor take on some overtime. If you have extra time on your hands, you can start some side gigs like dog walking or becoming a personal shopper. There are a bunch of ways out there, especially with the gig economy now to make some extra money on the side. Another way to increase your net worth would be to prioritize investments over depreciating assets. If you've got some extra cash on hand, consider investing it instead of spending it. Or if you're considering a bigger purchase, like a car or some new appliances, factor in that they'll be worth less over time and try to minimize the impact of that purchase on your net worth. For example, instead of getting a car loan and adding $20,000 to your liability side, save up for a used car that will only shave $10,000 off of the assets side. Another way that you can boost your net worth would be to maximize your retirement contributions. If you have a 401k with your employer, this is a great way to grow your net worth. Especially if they have a matching contribution offer. A lot of employers will match the first three to 5% of your retirement contributions. That's literally free money. So make sure you're at least contributing to that level. And if you can max it out, your net worth will grow even faster. That money will compound over time. And your net worth will just grow and grow. On the other side of the equation, we have liabilities. To get this number down you need to start paying off your debts. I'd start with the highest interest debt for the biggest impact. While you may think it would be best to get rid of your larger debts, the higher interest ones are actually costing you more and reducing your net worth in the process. Compounding works both ways. If you want to increase your net worth, you want your assets earning as high an interest rate as possible while your liabilities are costing you as little as possible. So the lower the interest rate the better. Okay. So now that you know what net worth is, why you need to know it and how you can figure it out, it's time for your weekly action task. No surprise here. It's to figure out your net worth. Now you can do this manually, but if you're like me, you appreciate making the process as easy as possible. Luckily, there is a way. Personal Capital is a website that will let you connect your various accounts and automatically track your net worth for you. And it's free! You can check it out at, GoFromBroke.com/pc, or just go to PersonalCapital.com. If you go through my link, it is an affiliate link so I may earn a commission if you sign up. But again, it's totally free and it is my favorite way to track my net worth. Personal Capital does require you to connect to your various bank accounts. So, if you prefer to keep that information to yourself, you can also track everything in a spreadsheet and just use a simpleformula to do the math for you. Just make sure you're updating it monthly or quarterly to track your progress. And that's that. Hopefully this podcast has been helpful for you. If so, I'd love it if you left a rating and review. And don't forget to hit subscribe so you never miss an episode. Thanks so much for listening and make it a great day!