Why Tracking Your Net Worth is a Critical Step in Financial Planning
When it comes to reducing spending, increasing income, paying down debt and building wealth people often talk about how important “budgeting” is. Although I think budgeting (and simply tracking spending) can be a real eye-opener for most people – they often overlook a critical measure of financial stability and that is: knowing your net worth.
A net worth statement is like a snapshot in time and gives you a great idea of “where you are” financially. It should show all of your assets along with all of your debts. Here is a free online tool to help you calculate yours.
A lot young people just starting out with car loans, student loans, credit card balances or mortgage payments are often shocked when they discover they actually have a negative net worth. This isn’t necessarily a bad thing – it just gives them a very black and white picture of where they are and where they need to be.
I have been tracking my net worth for a number of years now and it is amazing to see it change over time. Initially I would do a net-worth annually but more recently have started tracking it quarterly (when I receive my quarterly investment statements). Each quarter I evaluate how my net worth has grown (or shrunk), what decisions I have made, or what the markets have done to affect the overall number. I can see how much we have paid down our mortgage and what we have put away for savings.
Sitting down and actually taking inventory of where all of your money is, how much is in each account, and what is owing can be eye opening. Once you know all of these facts you can no longer be ignorant to how much debt you are in or what your overall position is financially.
Creating a net worth can be motivating to many. Once you have a picture of where you are you can set goals. “I want to have a positive net worth by 2018. To do this I must pay off my credit card balances (not just the minimum) and start putting 5% of my paycheque into an emergency savings fund.” Setting new goals or challenges for yourself as you achieve your older ones, and hitting new milestones as your net worth grows can be extremely satisfying.
Once you start keeping tabs on your net worth you may discover your entire mindset towards money shifts. You may feel the desire to grow your savings, and question your spending. You may have a stronger desire to stop living “paycheque to paycheque” and create a realistic plan to move forward.
Brooklyn Scott is a Financial Advisor/Mutual Funds Representative for Lewis & Jones Group/Desjardins Financial Group/Desjardins Financial Security Investments Inc. in Killarney, Manitoba.
Mutual funds are distributed through Desjardins Financial Security Investments Inc. For insurance products, Desjardins Financial Security Investments Inc. acts as a national insurance brokerage agency.