I’ve been asked recently, “If there’s one simple thing I could do by the end of the year to put myself on a good financial footing for 2017, what would it be?”
The answer is, you should track your net worth! Watch my recent video to learn more.
It’s the perfect indicator to help you figure out if you’re making progress on the path to financial freedom. If you’re not already tracking your net worth on a regular basis, get in the habit today! You can use any number of online software programs or a simple spreadsheet to get started.
The basic accounting formula is assets minus liabilities equals net worth. But allow me to decipher it a little more:
What you own – What you owe = Net Worth
What you own are all the things that have tangible value. Easiest things to think about are your savings and checking account balances as well as your retirement account balances. But it could also be other things such as a home, an ownership stake in a business or other major investment that has value.
Then you have to subtract out what you owe. I’m talking about debts. These are items such as a credit card balance, a student loan, car loan, or mortgage. These decrease your net worth because you have to pay them back some day.
In order to reach financial freedom you need to grow your net worth. Now if you’re a young professional or have recently graduated from graduate school with some student debt, it’s very possible your net worth could be negative. Don’t fret!! Presumably, your education will open career doors for you and eventually you’ll earn a return on that investment in the form of human capital, experience, and salary.
Everyone has to start somewhere. The focus should be on building net worth each year. That’s why it’s so important to track as a key indicator on a regular basis to make sure it’s improving. If your net worth is lower than you want it to be, let it be a message to you that you have some work to do in 2017.
The primary way you increase net worth is by increasing your savings rate consistently and over time. No get-rich-quick scheme or fancy investment strategy is going to cut it. Now is the time to start putting an action plan in place to change behavior so that you can prioritize saving.
Financial freedom is expensive and you won’t be able to borrow for retirement one day. The more you save now, the less you’ll be scrambling to save in the future. If you’re feeling stuck, please reach out for a free consultation.