We hear a lot of talk about credit reports and credit scores. But there’s little mention of calculating our personal net worth. If you follow my blog, you’ve probably heard me say that credit scores were not created for your benefit. They were created as a way for lenders to determine your creditworthiness. For more detailed information on credit scores, see my previous post.
Before I go any further, let me clarify something. Because of the way our economic system is set up, credit scores are essential. And they impact various areas in our lives. But a good credit score isn’t necessarily an indicator of good financial health.
It is possible to have an excellent credit score and barely make it from one paycheck to the next. Believe me, I know from experience. Having a good credit score may just mean you’re good at servicing debt (and creditors love that).
Instead of primarily focusing on credit scores, it’s more useful to know your personal net worth. (This is another one of those things they never taught me in school but should have.)
Assets – Liabilities = Net worth
Basically, you make a list of your assets (cash, property, bank/retirement accounts, etc.) and the associated value and list out all your debts and the amounts owed. Subtract the liabilities from your asset amount, and you’ll get your net worth total. There are apps and tons of free templates available that you can just plug in your information, and the calculations will be done for you. You can either google personal net worth template or use the template that’s available in excel. Also, if you prefer, you can use a pen, notebook, and a calculator.
The benefits of tracking your net worth include:
- It allows you to get a snapshot of your current financial situation. Calculating your net worth makes it possible for you to view the state of your finances in its entirety. Instead of focusing on a single factor, such as the amount of debt, it also considers your assets. Therefore providing you with a better idea of your overall financial health.
- It helps you to prioritize your debt. Seeing all your liabilities (debt) and amounts owed listed together in one place, will enable you to better prioritize your payoff strategy. If you pay more than the minimum due each month on your debt with the lowest balance, you will pay that debt off quicker. Consequently, you free up more money to make additional payments toward your next highest debt. And you keep this payment cycle going until you are completely debt-free.
- It motivates you to keep striving for improvement. Tracking your net worth in regular intervals (monthly, quarterly, etc.) is a great way to keep you motivated and engaged in your financial freedom journey. For me personally, I’m encouraged to work harder at eliminating debt each time I run the numbers. The less debt I owe means the more money I can invest. Which leads to a higher net worth and better financial stability.
Don’t be afraid to face the numbers. Your net worth is in no way related to your value and self-worth. So, don’t be discouraged if you end up in the negative after doing the calculations. When my husband and I first started tracking our net worth, we were in the negative. But as we continued to chip away at debt and increase savings and investments, our negative net worth changed to a positive.
And as you get accustomed to tracking your net worth, invite your child(ren) to sit with you as you plug in the numbers. This will serve as an excellent teaching moment.
Take care and happy tracking my friend!
“Wealth is a planned result that requires productive work and dedication. The Tanakh says, “The plans of the diligent lead only to abundance; but all who rush in arrive only at want” (CJB, Proverbs 21:5).” ~H.W. Charles
