You CAN Grow Your Net Worth
A long-time reader recently sent me a message. In 2017 they decided to give my long-time recommendation a try and start tracking their net worth. Now, three years later, they’ve grown their net worth by a whopping $75,000! That’s pretty incredible. And, it’s without making six figures and with considerable debt from student loans. While some of this growth was due to positive investment performance, the majority of their growth came from paying down debt and saving more money.
As they told me, tracking progress helps when you start to feel discouraged or overwhelmed by where you are today. And because it’s a new year, if you’re not tracking your net worth today now is the perfect time to start!*
Once you start tracking your finances, you can then look back and know your progress. Without tracking anything, it can feel as though you’re going through the motions of working to pay bills and pay down debt without making any real progress when that isn’t your reality at all. As you watch your own progress, it’s then motivating to stick with it, finding more ways to save, make money, and avoid those purchases which don’t add real value to your life – while confidently spending on those that do and that you can afford.
As this reader said, “I hadn’t realized just how much progress I had made until I compared it.”
Ask Yourself These Questions
Ask yourself these questions to see what you know off the top of your head or can quickly determine by checking a spreadsheet or free online tool you use:
- What is your annual salary?
- Approximately what percent of your annual salary goes to taxes?
- How much are you contributing annually to an employer-sponsored retirement plan, such as a 401(k)?
- How much do you save, monthly or annually, in addition to your 401(k) plan?
- How much is in your emergency fund?
- What are your fixed monthly expenses?
- How much do you spend on average on discretionary monthly expenses?
- Based on these numbers, how many months would your emergency fund cover your expenses?
- How much debt do you have?
- What is your net worth?
By asking these questions you can gain a sense of what you already know and what you still need to determine. And while this may seem like a lot of information, it’s really not too much. Free tools, such as Mint, YNAB, and Personal Capital, can help you track this information and with the right perspective, you’ll want to know this information. With this information, you can make the necessary changes to then know you can handle a loss of income (if you unexpectedly lose your job, for example) and be sure you are setting up your future self for success in what really matters to you (financial independence, early retirement, starting a business, increasing flexibility, having more time with family, etc.).
I feel strongly that you can’t know how much progress you’re making (or lack thereof) and how much financial potential you truly have if you don’t know your numbers.
Gather Your Financial Information
So, how do you get all of this information?
- Make a list of all the places where you have money. You don’t have to track down the balances to start. Just grab a piece of paper or a note on your phone and write down everything you can think of.
- Cash on hand
- Checking accounts
- Saving accounts
- Savings bonds
- Roth IRAs
- Traditional IRAs
- IRA rollovers
- Taxable investment accounts
- 401(k) or similar accounts, both with your current and former employers
- Consider your physical assets.
- Any other high-value assets
- Of note, I don’t include my car (a luxurious 2009 Ford Focus) or any other physical possessions in my net worth, as I plan to use them until they need to be trashed, recycled, or donated (as opposed to selling them down the road).
- When I was minimizing many of my possessions, I sold the bigger items of value I no longer used and you may have the opportunity to do the same.
- Include what makes sense for you and the things you own.
- Make a list of all of the debts you have. Again, don’t worry about the balances at first. Just gather a list of what you’ll need to track down.
- Student loans
- Car loans
- Credit card debt
- Mortgage balance
- Personal loans
I’ve seen it happen multiple times where people list everything and weeks or months later remember something else. That’s okay. Start with what you remember. You can always add something later.
Calculate Your Net Worth
Next, you’ll want to decide if you’re willing to maintain a manual spreadsheet (or something similar) or use a free tool like Personal Capital. Personal Capital is an account aggregator, which allows your account balances and transactions to be linked in one portal so you can see your net worth and cash flow all in one place. And, it’s free! Important note: please ignore all of their requests, calls, and pop-ups to talk to someone about their paid services.
Once you decide on the best method for you, you can gather the balances for all of your assets and liabilities. If you use Personal Capital, or something similar, you can see your net worth in real-time whenever you log in – no manual tracking required (just the occasional fixing of links to your accounts).
Remember: ASSETS – LIABILITIES = NET WORTH
Let me provide a simplified example to illustrate some of these concepts and the hidden potential you may have.
- Annual income (for a single individual) = $50,000
- 20% to taxes = $10,000
- Net income = $40,000
- Monthly income = $40,000 / 12 = $3,333.33
- Now the key is considering how to allocate that $3,333.33
- “Fixed” bills
- I put fixed in quotations because while we need most of these things and pay a flat amount for them on a monthly basis we likely aren’t locked into our living situation, car payment, or anything else forever
- Debt payments
- Other fixed bills…car payments, insurance, Spotify, cable, etc.
- How many of these can you reduce or eliminate?
- Do you need cable? Do you even want it?
- Can you shop around for car insurance and reduce your monthly rate? Probably.
- Let’s say you determine your fixed monthly bills, after making some changes, are $1,500 (including your minimum monthly debt payments)
- You then review your other monthly expenses and decide $750 is a reasonable monthly amount to cover food, gas, entertainment, travel, etc.
- $3,333.33 – $1,500 – $750 = $1,083.33
- “Fixed” bills
- This leaves you over $1,000 a month to aggressively pay down debt and grow your savings!
- And $750 might be a very generous monthly amount depending on your situation
- You’ll be glad you cut back more aggressively for a period of time to pay down debt, like this reader who paid down $17,000 in student loans in 1 year, or build an emergency fund
Of course, that’s one example. You’ll need to consider your specific circumstances and goals. But whatever they are and wherever you may be financially, if you aren’t tracking your net worth and cash flow, you can’t know what potential you have. As shown in the example, you might just have over $1,000 to save each month (in addition to the debt you’re paying down – which means your net worth is improving in two ways!), while still living on the large sum of $27,000 a year.
I encourage you, for your benefit today and in the future, to please track your numbers. Knowledge is power, as they say! And I’m happy to help, so send your questions my way.
*As I discussed with another reader recently who has been tracking their numbers and checking them regularly for years, at some point, it’s probably more worthwhile to focus on savings goals you can control, as opposed to net worth, which could go down significantly as your net worth grows and is more dependent on investment returns outside your control. Still, for many people, starting to track anything is a good place to start.