Perhaps looking through your financial statements and various bills and obligations isn’t your idea of a great Saturday night. Fair. However, it is important that you stay on top of where you are in order to ensure you are making progress towards where you want to be.
Now this isn’t an article about budgeting. (But we have plenty of advice there too.) This is an article about measuring. Measuring where you are now. Measuring the progress you have made over time. And then using these measurements to help you make decisions on what’s next.
Large companies measure their progress constantly: regular revenue and expenses, monthly financials, annual planning. As an individual, you can take a more measured (pun intended) approach to this. While its always best practice to watch your spending and checking account balances on a pretty near real time basis – think a minimum of weekly – you don’t need to look at your net worth daily or even weekly. Honestly if you are doing it on an annual basis, this is enough for most people. Its not something people really need to focus on more than quarterly – this is a long term measurement.
So now we have established when to do it. But how do you do it? It’s pretty simple: add up all of your assets that have clear economic value less all of your outstanding debts or obligations. What counts as an asset? Most likely not your witty social media hashtag abilities. For most of us it’s the basics: cash in checking or savings accounts, investment accounts, retirement accounts, that savings bond you still have from your great aunt gifted to you in the first grade. Also think assets that you could sell for cash. While it’s probably not worth adding up the value of your sweaters you could resell for 20 bucks each, do include any high value items that you own: car, jewelry, maybe that channel bag. You probably want to set a minimum threshold, say $1000 so you don’t get too tied up in the small things. Over time it’s those big asset categories that are really going to set the bar: investment accounts, home equity, business investments.
Now let’s get a little more technical about the cash value of assets. If you want to get really fancy some will argue that what you want is to assess the cash value of that 401K. In practical terms that means ~10% penalty if you wanted to convert to cash before retirement and less your applicable tax bracket. Say another 25% off that already reduced number. In reality, you will probably hold those funds until retirement, and we don’t know what your tax bracket will be. So if you want to just use the simple number that has already been valued for you? Go for it. The most important thing is ensuing that you use the same methodology every time you calculate your new worth. We are looking for an apples to apples comparison here.
And on the flip side? Debts. Credit card debt, mortgage balances, student loan debt, that $300 you still owe your bestie from your last girls trip. While this side of the equation is far less fun, it’s still important to get clear on these numbers.
Once you have all the assets listed and their values, as well as all the obligations and their negative values, it’s simple: add them up. Need a basic example? Let’s say that you are an apartment renting, car owning, student loan payer. You have $40K you have managed to put away in your 401K. While you bought that shiny new Audi for $50K (in cash!), the internet calculators show you that you can probably only get $28K if you sold it today. Besides your 401K, you also have an emergency fund checking in at another $20K. However, you also have a total student loan balance of $60K. Net worth calc? On the positive side of the equation: $40K (401K), $28K (car) and $20K (emergency fund.) On the negative? $60K in student loans. Add this all together: $40K +$28K + $20K – $60K. At this point you have a net worth of $28K.
Mark that number down. There is your first marker. Now don’t stress over it. It’s just where you are today. What matters most is progress and how you use these measurements to make progress. If you have a negative net worth or aren’t happy with the balance of your student loans or 401K – what will you do about it over the next month? Use that information to make decisions that align with your goals over the next year or period of measurement. If you want to get serious about your finances and financial decisions, measuring your net worth is key. You need a clear snapshot of where you are now as well as clear numerical facts showing the progress you have made. It’s important to ensure these numbers match your goals in life and that the everyday actions you are taking, for example contributing 6% of your income to your 401K, matches the goals that you have for yourself in life, like retirement! Whether the numbers tell the story you want or not, don’t get discouraged. Accept this point in time measurement and alter your decisions going forward. Save a little more, skip a few more nights out and put extra toward that student loan balance, do a reality check on if you really need a new car. The key here is to measure where you are, make decisions that match your priorities and then come back every few months or once a year and measure the progress that you are making.
