The Importance of Keeping an Eye on your Net Worth
The Importance of Keeping an Eye on your Net Worth
There are so many financial metrics people use to measure their financial progress. One metric that is all-encompassing and often neglected is Net Worth. Your Net Worth is the value of your assets minus the value of your liabilities.
It’s important to track your net worth over time to ensure it’s moving in a positive direction. Tracking net worth over time shows your progress in increasing your assets and reducing your debt.
Net Worth is the best way to understand your financial health. Net Worth captures all your financial efforts in one number that is easy to track over time.
Building up your emergency fund increases your Net Worth. Paying off student loans increases your Net Worth. Your retirement account increases by your contributions and investment growth and increases your Net Worth.
Other metrics that generally get more attention, like income, are not factored in the calculation of Net Worth.
If you are making good financial decisions over time, you will see which changes move your Net Worth in a positive direction. Some spending and investing decisions impact your Net Worth more than others. Purchasing a house adds the value of the house as a positive and the mortgage as a negative. Any cash that you moved from a bank account to a down payment will generally be neutral to the bottom line. As you track your Net Worth over time, the appreciation on the house will increase your Net Worth, and the mortgage payments will decrease the mortgage balance, which also increases your Net Worth.
An auto purchase has the opposite impact on your Net Worth. Purchasing an auto adds the value of the auto to your Net Worth, but the transfer of cash decreases your cash or a loan note to pay for the auto adds a liability that decreases your Net Worth. Since the auto decreases in value over time, the passage of time causes the auto to decrease your Net Worth.
Tracking your Net Worth adds to your knowledge about what choices you have to increase or decrease your Net Worth. You will benefit by adding more appreciating assets and minimizing the depreciating assets.
Financial planners can provide education, support, and recommendations on how to make increasing your Net Worth easier for you.