Using Net Worth as a Personal Finance Benchmark

This is a post by Miranda Marquit, who serendipitously appeared just as the present nasty virus was making me think I would die if I had to write a single word today. I think you’ll enjoy the article that she kindly wrote for us. Thank you, Miranda—you couldn’t have come along at a better time!

Miranda publishes her own (very engaging) blog at This Time It’s Personal.

When it comes to your journey to financial freedom, it helps to have milestones along the path. One of the personal finance benchmarks you can use is net worth. Your net worth offers you a picture of where you are at now. You can use it to chart progress toward financial goals.

Net Worth: A Financial Moment in Time

Your net worth represents a financial moment in time. It is a snapshot of your current money situation. You figure your net worth by subtracting your liabilities from your assets. Once you have that number, you have a place to start.

The first step is to add up your assets. This includes the market value of your home, as well as the value of your investments, your checking account, your savings account, and any other items of significant value. Next, you add up your liabilities. Your liabilities include what you owe on your mortgage, any debts you have and other obligations that you have incurred.

Here is a basic example of how you can do a net worth calculation:

Assets:

• Market value of home: $180,000
• Savings: $10,000
• Checking: $3,000
• Investment account values (including retirement accounts): $35,000

Total: $228,000

Liabilities:

• Mortgage balance: $165,000
• Car loan: $9,000
• Credit card debt: $4,500
• Medical bills: $2,000

Total: $180,500

Net worth: $228,000 – $180,500 = $47,500

As you can see, the net worth in this case is $47,500. To increase your net worth, you will need to either pay down debt or increase your assets. Your assets can be improved by increasing your income, or by making investments that appreciate in value.

Measuring Your Progress

Once you know where you stand right now, you can begin making plans to improve your situation. Take stock at regular intervals. Decide whether you want to measure your progress every month, every quarter, every six months, or every year. Many people find that tracking their net worth monthly or quarterly helps to keep them motivated.

It is important to realize, though, that there are some things that you won’t have complete control over. If you are engaged in long-term investing, such as the investing you do through a retirement account, your net worth might fluctuate in the short term with the market. Many people experienced a lower net worth during the recession, as their retirement accounts dropped. (However, those who weathered the down market are now seeing a sharp rebound in net worth.)

Remember that your net worth is a picture of your current situation. Try to figure your net worth on the same day of the period, such as the first day of the month, or the last day of the quarter. This way, you will be more likely to be comparing apples to apples when it comes to your pay schedule, and the bills you pay.

Create an overview of your financial situation by tracking your net worth over a period of years. As you work on a debt repayment plan, as you pay down your mortgage, and as you look for ways to increase your assets, you will find that your net worth trends higher—leading you toward a more secure future.

Miranda writes for a variety of personal finance web sites, including the AllBusiness Personal Finance Corner, and Credit Cards Canada, a site specializing in the best Canadian credit cards.