Long-term financial goals, especially retirement, can feel really far away. And it can be easy to stray from your financial plans if you’re not keeping tabs on your progress towards those goals. But one way you can ensure that you’re staying accountable to your financial plan is by tracking your net worth.
To get an idea of how close you are to your financial goals, it’s helpful to know where you stand financially. Fundamentally, your net worth is your assets minus your liabilities.
Just by doing this simple calculation, you can see whether you have enough assets now to pay for your financial goals after you’ve accounted for your liabilities.
But it’s not enough to just calculate your net worth once. You have to track it regularly to know if you’re moving closer towards your goals. There are many ways you can track your net worth - some people use spreadsheets, while others use financial planning apps. You can track your net worth as often as you want.
The more detailed you are in listing your assets and liabilities when calculating your net worth, the easier it is to see which assets and liabilities influence your net worth over time. That way, you can work on improving your financial plans to help you increase your net worth.
Let’s take the case of Alex, who tracks their net worth every quarter. The table below shows a breakdown of Alex's assets and liabilities and how they impact their net worth:
Assumptions: The market value of Alex's car isn’t considered an asset in this scenario as the vehicle depreciates in value over time.
In this example, we can see that Alex’s net worth went up because they paid off their credit card and reduced their car loan while also adding more money towards their investments.
Keep in mind that you're not tracking your net worth to maintain a high net worth all the time. Rather, it’s about making sure that you’re staying on track to hit your short-term and long-term financial goals.
So, if your net worth declines temporarily because you paid off your credit card, put a downpayment on a house, or paid for your child’s education, that’s OK, as long as you’re also saving towards your long-term goals, such as your retirement.
But, if your net worth declines because you’re paying for one too many vacations or shopping sprees, that’s when you need to reassess your spending habits and budget to get you back on track.
Ultimately, tracking your net worth is one of the many tools you can use in financial planning to help you achieve your goals. Whether your goal is to retire comfortably or have the freedom to do what you want with your time, knowing how far (or how close) you are from those goals by tracking your net worth empowers you to plan your finances to get you there.
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