As an entrepreneur or just someone wanting to improve their financial position, it is important to track net worth. In this article we list why it is important and the advantages of tracking your net worth
What is Net Worth?
The formula for calculating your net worth is pretty simple: add up everything you own (assets), then subtract everything you owe (liabilities).
Let’s say you own a house worth $400,000, have $30,000 in your retirement account, and another $5,000 in savings. Add these up and you get $435,000 for total assets. If your home mortgage is $150,000 and student loans are another $10,000, your total liabilities are $160,000. Subtracting liabilities from assets gives net worth
Why is it Important?
Tracking your net worth can be a powerful tool for helping you keep your financial life on track. A better understanding of your net worth gives you the ability to make better financial choices and to manage your success or failure in reaching long-term goals.
Assessing where you are today allows you to plan for where you want to go tomorrow. Once you have an accurate picture of your current finances, you can begin to set some important financial goals—and then figure out how you’re going to get there.
By tracking your net worth you can measure your progress toward financial independence.
Tracking net worth also reveals whether you are on the right track to reach your financial goals or not.
Tracking net worth can also help you determine how much you need to save every month to reach your goals.
Monitoring your net worth is important because it gives you an overall picture of your financial health. By looking at changes in your net worth over time, you can assess how well you are doing financially and make decisions to improve your situation.
Goal-setting – Tracking your net worth helps you set specific, measurable and realistic goals. For example, you might want to double your net worth over a five-year period or reach a certain amount by age 65. Whatever you choose, make sure it’s a S.M.A.R.T goal that makes sense for your situation
It can also help you identify any problem areas in your finances and make adjustments that will put you back on the right path.
It keeps you motivated: Once you know what your net worth is, it’s easier to set goals for what you’d like it to be. You’ll get a boost every time you recalculate and see that it has increased.
It provides perspective
While it’s good to track other metrics, like monthly income or investing performance, calculating your net worth will give you a much broader view of how well (or poorly) your finances are doing overall.
It’s also one of the first things lenders will look at when you apply for credit. By knowing where you stand financially, you can identify areas for improvement and adjust your spending habits accordingly.
You’ll spend less time worrying about money if you know exactly where you stand financially. This is true even if you have debt or other challenges, knowing exactly where you stand will help you figure out how to fix it.
Tracking your net worth can help motivate you to increase your assets and decrease your debts. If you’re saving for retirement, trying to buy a house or just want more financial security, knowing your net worth will make it easier to measure your progress toward these goals.
It helps with decision-making and risk assessment. If you have a big expense looming in the future — say, buying a house or retiring – you can use your net worth as one measure of whether or not you’re ready for that change. It’s hard to just guess how long it will take to save up enough money for a down payment on a home or how much money you’ll need to retire comfortably. You can use your net worth as an indicator of when you’ll be able to afford those things.
One of the main advantages of tracking net worth is that it allows you to see your finances with a “big picture” view. Monthly profit-and-loss statements and other financial reports often give you only a limited view of your finances, which can obscure your weak points and make it hard to identify problems as they develop.
An advantage of tracking your net worth is that you can see how far you have come and how quickly you are progressing. You can also see how much of your net worth comes from each area, such as savings, retirement accounts or investments.
Better use of money
When you can see exactly how much your assets are worth and how much your debts add up to, you will have a better sense of where your money really goes and what it does for you. You may decide to liquidate some of your assets and pay down debt, for example, or realize that you could reduce the number of credit cards you carry by consolidating them all into one. Tracking these kinds of numbers might also help you make better investments in the future because you will have a clear sense of what your financial status is at any given point in time.
Legacy planning – Your net worth statement can help give you insight into how much money you have to spend now, save for the future and pass on to heirs
Once you know what your net worth is right now, it’s easy to track how changes in your income or expenses affect it over time. Simply repeat the process on a regular basis — every month at most and keep an eye on how your number changes over time.