Do you know your net worth? We didn’t for many years. We spent the first 17 years of our marriage with our heads in the sand when it came to our money. Honestly, we didn’t want to know what our money situation was because that might mean we have to be responsible for our financial situation. How many of you have been there?
Facing our financial situation in 2013 was tough – really tough. When we finally looked at our spending at debt numbers, we found a massive mess. I spent a good 4 months after we started our debt payoff journey kicking myself for the fact that we didn’t get our stuff together earlier.
It’s tough to face up to your financial situation if things aren’t healthy, and for that reason we never calculated our net worth, either. About 5 months into our debt payoff journey I figured out our net worth. And guess what? It actually helped us on our debt payoff journey. Why? Here are 5 reasons why knowing your net worth will help you improve your financial situation.
Calculating Net Worth
I guess we’d better start here. If you’ve never learned how to calculate your net worth, never fear – it’s pretty simple.
Step 1: Make a list of all liabilities. Every person you owe: your mortgage, car or other loans, credit cards, mom and dad, student loans, whatever. Tally up the total. Here’s a sample:
Car Loan: $8,000
Student Loan: $4,500
Credit Cards: $6,500
Step 2: Make a list of all assets. This includes your house value if you’re a homeowner, the value of any cars, boats or other large recreational vehicles you own, any bank, money market, retirement or investment accounts, and any other valuable assets. Here’s a sample:
Home Value: $300,000
Car Value: $8,500
Investment Accounts: $9,000
Bank Savings/Money Market Accounts: $2,000
Retirement Accounts: $150,000
Step 3: Subtract your liability number from your asset number, like this:
Total Assets: $469,500
Total Liabilities: $269,000
NET WORTH: $200,500
Some people don’t like to include retirement accounts in a net worth figure, in which case the fictional person above would have a net worth of $50,500.
As you can see, figuring our your net worth is pretty straightforward and simple in most cases, regardless of whether or not you like the numbers you see. Now, here are five reasons why it’s beneficial to know your net worth.
Your Net Worth Number Gives You Your Whole Financial Picture
Knowing your net worth means you know exactly where you stand financially. It’s the number that says “If I had to sell everything I own and pay off all of my debts today, this is how much cash I’d have.” If you’re looking to know that number, it’s best to not include your retirement accounts in your net worth figure, especially if you’re under age 59 1/2.
Your Net Worth Number Gives You a Sound Starting Point with which to Set Financial Goals
If you know your net worth, you can better determine where you’d like to be financially. It’s easier to set realistic and attainable goals if you’re going off of a net worth number as your starting point because you can also determine the net worth you’d like to have in place based on achievement of those goals.
Knowing Your Net Worth Helps You Focus on Something Other than Debt
Personally, we found simply focusing on debt highly overwhelming. When we learned to also focus on our net worth as a whole, the picture didn’t seem as bleak and we were more encouraged as we worked to accomplish our goals.
Knowing Your Net Worth Helps with Financial Prepping
If you’re ever in a situation where you need money NOW (such as in a job layoff situation, economic crisis, etc), knowing your net worth, where all of your assets are and what your liabilities are will help you to be able to determine quickly how you can access your funds to cover expenses if need be. When you have an up-to-date picture of your net worth, you know right now where you can pull money from and what needs to be paid.
Knowing Your Net Worth Helps You to Better Plan for the Future
If you know your net worth, you can more accurately calculate exactly how much more money you need for retirement and other future endeavors. When it comes to retirement – early or otherwise – the income and savings factor isn’t the only factor that matters: the debt factor matters too. Knowing your net worth and having a clear picture of all numbers in front of you helps you determine exactly what you need to do to prepare financially for future events.
If you haven’t calculated your net worth, do it today. This highly valuable, quick-to-do activity can bring you peace of mind in a number of ways.
Do you know your net worth? If so, how has tracking it helped you financially?
*Photo courtesy of Pictures of Money