Do you know your net worth?

Net worth is one of the most important numbers in all of personal finance. 

While monthly budgets will help you prioritize and understand how you spend your money, your personal net worth will show you how much you actually have.

Knowing and tracking your net worth will give you a clear picture of your overall financial status and the direction you're headed.

Once you figure out and start to track net worth, you'll not only be much better equipped to make financial decisions but also better able to grow your wealth.

What Is Net Worth?

Net worth is the total value of all your assets minus any liabilities you have. Basically, it's everything you have minus everything you owe.

Knowing your net worth is a way to see a snapshot of your financial situation at any given point in time.

Tracking net worth will allow you to monitor your progress over time and ensure your future financial stability.

Why Net Worth Is Important

Most of us are familiar with our income and have a good idea of our day-to-day expenses. 

But our day-to-day spending is fluid and even if you're tracking everything, you're still only seeing part of the picture.

While you likely have budget categories to help you pay your long-term debt, a typical budget doesn't include the asset side of the equation.

For example, if you have a mortgage, you're probably budgeting that monthly payment.

But you probably aren't using your monthly budget to track the total amount you owe or your house's current market value.

By tracking net worth you're able to see that liability shrink and asset grow as you make each monthly payment.

Another reason knowing your net worth is important is to give you more insight into your longer-term savings goals.

Your brokerage accounts and savings accounts will fluctuate with stock market and interest rate changes. And while you may enjoy logging in to view your progress, the gains or losses are isolated.

Tracking them as a part of your net worth allows you to see how those changes are affecting your overall financial goals. 

Tracking your net worth can also have the benefit of setting your mind at ease when unexpected expenses come up. 

Often, when your budget gets busted, you'll feel deflated and frustrated. But seeing how that expenses may or may not affect your net worth can bring some relief.

If your spending is higher one month, but your investments are still gaining, or your liabilities are still decreasing, knowing your net worth may give you some comfort.

Tracking your net worth is a way to see the big picture and make sure regardless of fluctuations in your daily spending and earnings you're heading in the right direction.

How to Figure Out Your Net Worth

Figuring out your net worth takes a bit of effort, but it's well worth it.

Step 1: Determine Your Assets

The first step to calculate your net worth is to figure out what assets you have and their value.

Look through your various financial accounts (your bank accounts, investment accounts, retirement accounts, social security, etc.) and tally those up. 

You'll also want to add up the values for any personal property you have, like your house or other real estate, car, jewelry, etc.

Step 2: Determine Your Liabilities

Next, you'll need to add up all your liabilities.

These are all the things you owe like credit card debt, student loan debt, your mortgage, a car payment, etc.

Step 3: Calculate Assets - Liabilities

Once you've got your numbers you can figure out your net worth by simply subtracting your total liabilities from your total assets.

What If Your Net Worth Is Negative?

If you've been working hard to get your finances in order, seeing a negative net worth can be like a punch to the gut.

But don't worry! 

Negative net worth means you owe more than you own, and while that sounds scary, it doesn't necessarily mean you're in trouble. 

Remember, 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's a good way to 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, but you'll also eventually have more to put towards savings to build up your asset column and work your way toward a positive net worth.

Reasons to Track Net Worth

Now that you've got a snapshot of your current financial picture, what do you do with that information?

Well, by itself, net worth is kind of just a novelty number.

It's a cool thing to know, but without knowing if it's increasing or decreasing there's not much you can do with it.

But if you make a habit of tracking your total net worth you can actually learn a lot.

#1: Tracking your net worth can make sure you're trending in the right direction

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 impacted.

Your daily cash flow isn't always an indicator of your overall financial health.

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 realize it.

At the same time, if you notice your net worth trending downward, you can take steps to correct whatever's causing it.

#2 - You can get a clear picture of your debt by tracking net worth

You may be vaguely aware of the debts you have based on your monthly payments, but tracking your net worth will let you see clearly how much you owe and to who.

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 wracking up consumer debt at the same time, it'll show in your net worth. 

#3 - Tracking your net worth lets you see if you're investing or just spending

Tracking your net worth is one of the best ways to keep focused on investing for the future. 

If you're a natural spender like me, it can be tough to set money aside in retirement funds.

Even if you're putting some money into a savings account, 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 the current month compares to the previous month and whether it'd be a good idea to move some cash from 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 7-9% annually. 

You may have some downturns, but investing in the market is one of the best ways to grow your net worth.

Investing can seem intimidating, but there are investing platforms like M1 Finance and Betterment that offer an easy way to get started.

Not only do they provide knowledgeable guidance, but by offering the option to buy fractional shares, you don't need a lot of money to get started.

#4 - Tracking your net worth helps you decide when to make big purchases

Another great reason to track your net worth is that it'll help you make more informed spending decisions, especially when it comes to large expenses like buying a new house.

Your net worth is predominantly a way to track your progress toward your long-term financial plans.

Being able to see at a glance what impact a large purchase will have on those plans is an important factor in making an informed decision.

#5 - Set and evaluate your financial goals more effectively by tracking your net worth

Finally, tracking your net worth is a great way to see what sort of progress you're making toward your financial goals and help you set new ones.

Ways to Increase Your Net Worth

Your net worth is a pretty simple equation: assets minus liabilities.

That means if you want to improve your net worth you need to make the assets number higher and the liabilities number lower.

Here are some ways you can increase your assets.

#1 - Reduce your expenses

Between impulse spending and recurring monthly expenses, most of us probably have a good chunk of money we can reclaim if we get more intentional with our spending.

If you're not sure where your money is going, start tracking your expenses.

#2 - Increase your income

There's only so much spending you can cut before life starts to get uncomfortable.

Instead of depriving yourself of everything enjoyable, see if there are some ways you can increase your income.

If you have a traditional job you could ask for a raise.

Or if you have some extra time on your hands you could start a side gig like dog walking or becoming a personal shopper.

#3 - Prioritize investments and appreciating assets over depreciating ones

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 the fact that they'll be worth less over time and try to minimize the impact of the purchase on your net worth.

For example, instead of getting a car loan and adding $20,000 to your liabilities, save up for a used car that will only take $10,000 away from your assets. 

#4 - Maximize your retirement contributions

Signing up for a 401k with your employer is a great way to grow your net worth. Especially if they have a matching contribution offer.

Many employers will match the first 3-5% of your retirement contributions.

That's literally free money, so make sure you're at least contributing to that level.

If you can max out your retirement contributions, your net worth will grow even faster.

#5 - Pay off debt

On the other side of the equation, we have liabilities.

To get this number down you need to start paying off your debts.

Reducing your credit card balance is often the easiest place to start.

But you should look to eliminate the highest interest debts to make 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 and your liabilities costing you as little as possible (ie, having a low interest rate).

How to Track Net Worth

There are several different ways you can use to track your net worth.

Many people use a spreadsheet to list out their assets and liabilities and use a simple formula to run their net worth calculation.

Because manual tracking like this will require you to update your account totals and property values, it's best done on a monthly or quarterly basis.

Since spreadsheets aren't the prettiest things, if you do go this route, consider using a net worth tracking chart to plot your movements over time so you can see your financial progress at a glance.

For those of you like me who'd rather have a less hands-on approach, take a look at Personal Capital.

Personal Capital is an online net worth tracking app that will automatically update and track your net worth. Best of all, it's a free app!

You simply connect your accounts and Personal Capital will import the values for you.

They can even track your car and home value.

I've been using Personal Capital for years and it's by far my preferred net worth tracker. It's simply the best app out there to track your net worth.

Track Your Net Worth Today

Now that you've got the knowledge and the tools to track your net worth, it's time to get started.

If you're comfortable sharing your account information, sign up for a free Personal Capital account for the fastest results.

If you'd prefer to go the DIY route, here's a net worth tracking template for Google Sheets that will give you a head start.