There are a number of different metrics that you can use to understand your financial situation. One of the most important of these is your net worth. Unlike your net income, which is an expression of how much you earn minus your expenses, your net worth is a tally of your assets minus your liabilities.
By calculating your net worth, you can see where you stand financially and where you might need to make improvements. Here are 10 reasons why you should keep close tabs on your net worth.
Last updated: Sept. 1, 2021
You Can See If You’re Trending in the Right Direction
Increasing net worth is one of the primary goals of financial planning. When you calculate your net worth regularly, you can see if it is trending in the right direction. With proper financial planning, saving and investing, people tend to increase their net worth over their lives, in part due to the fact that incomes tend to increase as we age. If you find that your net worth is decreasing even when you start earning more money, it’s a clear sign that you need to make some adjustments in your financial life.
It’ll Help You To Assess Your Debt Levels
Debt is a nagging drag on net worth that’s all too easy to ignore. But if you’re carrying debt, it’s important to face reality before things get out of control. When you record your net worth, you can see in black and white exactly how much you owe and how rapidly your debt is growing. By regularly calculating your net worth, you can assess your debt levels and manage them accordingly.
You’ll Be Able To Determine If You’re Investing or Simply Spending
Although there’s nothing wrong with spending some of your money on entertainment and depreciating assets, it’s important that a significant portion of what you earn goes toward investments. If you spend most or all of the money that you earn, you’ll never be able to increase your net worth. But if you invest in appreciating assets like stocks and real estate, your money goes to work for you rather than simply vanishing.
It’ll Help You Evaluate Your Investment Portfolio
Calculating your net worth regularly is a good way to see just how well (or poorly) your investment portfolio is performing. Although investing in stocks is generally a good way to build your net worth, not all stocks go up in value. Similarly, real estate is generally a good long-term investment, but buying an overpriced property in a bad neighborhood is not a formula for success. Keep an eye on your investment portfolio regularly to ensure it’s working for you, and don’t be afraid to make changes if it’s not.
You’ll Know If You Can Afford a Big Purchase
Before you make a big purchase, it’s important to know if you’re in a position to afford it. Whether it’s a house, a car or even new appliances for your house, big purchases can wreak havoc on a financial plan. By knowing your net worth, you can tell right away if you’re in a position to afford these types of big purchases without upsetting your long-term financial plans. If you’re not quite ready, you can take some time to shore up your finances before spending a big chunk of change.
It’ll Help You Keep Your Debt-to-Income Ratio Under Control
Your net income is a good way to calculate your debt-to-income ratio, but your net worth will also give you the debt portion of that equation. If you find that your debt is rising every time you check your net worth, there’s a good chance that your DTI is rising as well. While increasing debit is typically bad in and of itself, a rising DTI might also hurt you if you’re looking to buy a home or investment property, as it is a critical metric for qualification.
It’ll Identify Areas Where You Can Improve Your Net Worth
The only ways to grow your net worth are to lower your debts and increase your assets. But until you actually calculate your own net worth, it can be hard to tell exactly where you need to improve. High debt levels, for example, are not necessarily damaging to net worth if that debt has been used to increase asset levels, such as through investment property. But if you’ve got high debt without a lot of savings or investments, you’ll want to trim those levels down.
It’ll Help You Set Additional Goals
Financial planning is not a “one-and-done” exercise. Rather, it’s a lifelong process that should be continually updated. As you reach one financial goal, you should be setting additional ones. Tracking your net worth is a great way to see how you’re doing in relation to your financial goals, and it can also help you set new goals.
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It’ll Help You Plan For Bequests
As your net worth increases, you might want to start planning for where all that money will go once you pass. Calculating your net worth is a great way to identify all of your assets so you can plan how to distribute them to your heirs. It’s also a great way to keep a current inventory of these assets so your heirs or executor can understand what you own in the event of your untimely death.
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You’ll Be Able To Ensure Your Emergency Fund Is Sufficient
Having a sizable emergency fund of at least three to six months of your income is the cornerstone of a solid financial plan. As an emergency fund is an asset, it’s also an important part of your net worth calculation. If you regularly review your net worth, you’ll always know where your emergency fund stands in relation to your other assets. If your emergency fund is too low, you’ll know it might be time to convert some of your other assets into your liquid emergency fund.
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