Tracking Your Net Worth
Updated: Dec 13, 2019
We received a lot of interest in this post, so we decided to create a Q&A video for it!
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Let’s start out with a little bit of background...
Eddie and I decided to combine our finances after we got engaged but before the wedding (which is coming up in a few months...WE CAN’T WAIT!) for many reasons but a primary reason was to force us to make joint decisions about our goals and dreams and what we’d need to do to achieve them. One of those goals was to travel more (or “go on adventures,” as we like to say). But what would we need in order to actually travel more? Simply put: cold...hard...cash. While we can dream all day of sipping wine on the balcony of a Tuscan villa and not needing to be anywhere else, but it will cost a significant chunk of change to actually make it happen. We would need to budget conservatively, save aggressively, and invest wisely to make our dream a reality.
One method we’ve used to determine if we’re on the right track is to calculate our combined
Net Worth on a monthly basis.
Net Worth = Total Assets - Total Liabilities
We each make countless financial decisions in a given day and it can be difficult to tell the signal from the noise (seriously, click the link, buy the book, you won’t regret it). Thankfully, the Net Worth calculation is very simple, only takes a few minutes once a month to calculate, and results in a single number. It’s a high-level view of the impact of all of the hundreds (or thousands) of financial transactions that you make in a given month. (It’s also really difficult to fudge the numbers with this one. Be prepared to face the truth!)
Here’s a relatively simple example:
Note: these are not real numbers. They were made up purely for demonstration purposes.
Your situation may be more or less complicated than the one above. The key is to include all of your financial accounts. Do you have a CollegeChoice(529) account for a child of yours? Do you contribute to a Health Savings Account (HSA)? Do you have a second mortgage? How many credit card accounts do you actually have open currently? It’s important to realize this is not meant to make you feel bad in any way, but rather to give you the awareness you need to get where you want to be in the future.
It is possible (and likely) that an individual has negative Net Worth at some point in his or her life (like Eddie when we met). Imagine a young person who just graduated college with a significant amount of student loan debt and little to no assets. If you’re in that boat, try to focus on the change in net worth as it will still indicate whether you are headed in the right direction. For example, increasing your net worth from -$50k to -$40k is a positive $10k change and should be viewed as an accomplishment!
Notice that an increase in an asset or a decrease in a liability ultimately have the same effect on Net Worth. Whether I pay off the $12,000 I owe on my car or invest an additional $12,000 in my retirement account, the change to my Net Worth is the same. In other words, they are both good financial decisions of the same magnitude.
“That’s great guys, but what does net worth have to do with traveling?”
We take a snapshot of every financial account balance at the end of every month and add it all up to get our Net Worth. This way we can look back at prior months and (hopefully) see our progress. Our “Travel Fund” is made up of a savings account and a brokerage (i.e. investment) account. The total of these two balances at the end of the month are the total funds we’ve allocated to our trip abroad. By tracking our net worth, we can put an actual cold, hard number to our financial stability. This lets us determine, at a glance, if we’re in a situation where we can go on a trip (or move to Europe for an entire year in this case). We aren’t guessing or assuming anything about our finances. Like building a solid foundation for a house, tracking your overall net worth creates a solid foundation, which you can use to help improve your financial stability.
Check back soon for a post about how we determined our initial monthly travel abroad budget.
Eddie & Megan
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