What is the most important number for your financial freedom?
Do you know the number that gives you the best understanding of your finances?
When I realized how much I was being underpaid, I started reading everything I could about career success which quickly turned into reading about finances and financial freedom. If you had asked me before I started doing this research, "what is the most important number for your financial freedom?" I probably would have said...
Or maybe our debt.
It seems crazy now that I didn’t know this. I thought of myself as being pretty financially savvy, at least much higher than average. I took economics, I'm great with numbers, and love making spreadsheets. I worked in accounting for a car dealership for a year before going to grad school. I've been good at saving and great at paying off our mortgage. I balance our accounts once a month. But I didn’t know the answer.
Turns out it isn't any of these things. It's your net worth.
Your net worth is the total value of all of your assets (the things you own and money you have) minus your liabilities (what you owe). And net worth alone isn't the most important number, it doesn't matter how much you have today, what matters is that your net worth is going up.
Let me repeat that – what matters most is that your net worth is going up!
Do you know what your net worth is right now?
I didn't. I was watching a webinar that really brought home the importance of net worth and literally created a spreadsheet while I watched. I was a little surprised by the number. It was higher than I expected - because of the value of our house. But it was also lower than I expected, because the amount of money we have saved versus our debt.
How to calculate your net worth
Luckily, net worth is relatively easy to calculate, but it's also easy to forget things. Here are the key components, you can also insert them directly into this Net Worth Worksheet.
Assets - this is what you own + the money you have
Cash - how much money do you have across all checking and savings accounts?
Investments - how much money do you have invested?
Money owed to you - does anyone owe you money, for example loaning money to a friend or family member?
Long-term assets - this includes the money you have put in accounts that you cannot access until later (e.g., a 401k)
Pension plan - don't forget about a pension plan you might be part of for work. I was on version #3 of my net worth spreadsheet before I remembered this one. We have this tiny pension and no online access, so it's easy to forget.
Property assets - what is the value of the property you own. This might include a variety of things:
House - this is the most obvious. What's the value of your house? I like to stay a little on the conservative side for this, probably because I still clearly remember the last recession and housing bubble. Even if you have a mortgage, include the full value of what your home is worth - how much could you definitely get for your home if you put it up for sale?
Cars - honestly I completely forgot about cars, and obviously my car mechanic husband pointed this out when we went through our net worth together. Figure out the value of your car if you sold it today, not how much you paid for it. You can use things like Autotrader to get a ballpark idea.
Other valuables - do you have jewelry, art, collectibles, etc. that have a high value? I personally don’t have very much of value, but if you have valuable art, for example, that would be worth including.
Liabilities - this is what you owe
Mortgage - how much do you owe on your mortgage?
Student loans - do you have student loans? How much do you owe?
Credit cards - how much do you owe on credit cards?
Line of credit or home equity loan - do you have a line of credit or home equity loan?
Car debt - how much money do you owe on your car?
Unpaid taxes - do you have any back taxes you need to pay off?
Other loans - do you owe any more money?
To calculate your net worth, you add up all you assets together to get a total number for your assets. Then you add up all of your liabilities. Then put the total assets minus total liabilities. This is your net worth or this spreadsheet will do it for you.
If your net worth is negative - don't freak out. This is pretty normal, especially if you own a house or just graduated from school. The goal is to know your net worth and for your net worth to be going in the right direction - over time you want your net worth to increase.
How often should you check your net worth?
There are people in the financial world who believe you should check your net worth EVERY DAY! At a minimum they recommend checking at least once a week. This webinar I watched presented a strong rationale for checking regularly - if you check your net worth every morning, you start the day thinking about money and how much you have, this will affect the way you make money decisions throughout the day, which will ultimately increase your net worth. He wasn't advocating for frugality, but more like informed decision making regarding spending and how it affects your net worth.
That seems like great advice, but he's a single man in his 30s. I manage a large team at work and have 2 kids and a husband at home. I’m BUSY. So it doesn't seem that realistic to check daily, even if an app will do it for me. My new approach became checking my net worth once a month. I balance our books once a month, so that seems very feasible. Plus, I think on a daily basis it would cause me more stress than benefit. The Net Worth Worksheet allows you to track your net worth monthly to see the changes over time.
What do you need to know and what do you need to do about your net worth?
Net worth is the most important number to set you up for financial freedom and retirement. Your net worth is equal to all of your assets (what you have) minus your liabilities (what you owe). You want your net worth to be going up!
You can calculate your net worth right now and moving forward you want to check it at least once a month to get an idea of whether it’s going up or down and how fast it’s changing.
You don’t need to be overwhelmed or discouraged. Knowledge is power and this is an easy big step in helping you reach your financial goals.