On the first of every month, I wake up at 5:15 a.m., brush my teeth, and put on my robe.
I walk downstairs, pour a cup of coffee, and head to my favorite chair in the living room.
I then power on my laptop and open an Excel file called “Adair Family Balance Sheet.” Using this basic spreadsheet, my wife and I have been tracking and discussing our net worth for years.
It takes me about 20 minutes to update our family balance sheet each month. The hardest part is remembering all the passwords for our accounts.
When I finish entering the new account values, I study the spreadsheet for about two minutes.
I hope to see that our money efforts that month resulted in our assets increasing in value and our debts decreasing.
When I’m finished with the updates, my wife grabs her coffee and sits with me. She will likewise study the family balance sheet for about two minutes.
We’ll then spend about three minutes talking about the changes from the previous month.
And, that’s it.
It takes us less than 30 minutes each month to track and discuss what I consider the most important metric in personal finance.
That’s all the time it takes to know if we are progressing towards our most important goals. By tracking our net worth, we can quickly see if we are making good money decisions or need to make adjustments.
I recommend everybody, no matter where you are in your financial journey, track your net worth.
Just like budgeting with two simple numbers, tracking your net worth is the best, and easiest, way to measure your money progress.
There’s no better way to learn how much money you’re keeping after a month of making money.
In this post, we’ll talk about what “net worth” means, how to track it, and why it’s so important.
Let’s start with what net worth means.
Going into hiding straight from a London pub.
One night when I was studying abroad in London years ago, my good friend, Kais, and I were talking in a pub. I don’t remember what we were talking about when he offered:
“If I was in trouble and needed to go into hiding, I could sell everything that I own, pay all my debts, put the leftover money in the bank, and be fine for a couple of years.”
Uhh, OK…
At the time, I had no idea what he was talking about.
Still, I had to admit that it seemed pretty cool that he had that kind of financial flexibility. I knew I couldn’t survive for a couple of weeks, let alone a couple of years.
Looking back years later, I now realize that he was talking about his net worth.
Kais, if you’re reading this, drop me a line to let me know you’re not hiding.
So, what is net worth?
Your net worth is simply all of your assets less all of your liabilities.
Net Worth = Assets – Liabilities
Yup, you only need those two numbers to calculate your net worth, the most important number in personal finance.
There’s no complicated math involved. Just addition and subtraction, which couldn’t be easier in a basic balance sheet (or spreadsheet).
Let’s start with understanding what counts as an asset.
What are assets?
An asset is anything that has economic value and can be owned or controlled.
In even simpler terms, an asset is just about anything you can think of that could be exchanged for money.
My family’s current assets include:
- Retirement accounts for both me and my wife
- College savings accounts for each kid
- Health savings account (my favorite account… we’ll revisit)
- Checking accounts
- Savings accounts
- Cars
- Jewelry
- Properties
- Cash on hand
Other common examples of assets include:
- Collectibles (artwork, coins, designer bags)
- Furniture
- Household goods (TVs, appliances, rugs, etc.)
- Clothes
- Tools
- Recreational gear (bicycles, golf clubs, boats)
- Toys
It’s up to you to decide what assets to include in your balance sheet. There is no strict science to it. That said, there’s no point in overstating (or understating) your assets. You (and your family) are the only ones who will be reviewing your balance sheet.
I personally don’t include all of our household items, but you are certainly welcome to. For me, it’s not worth the time and effort to determine how much I could earn by selling my TV or snowboard.
It’s perfectly acceptable if you want to tally up the value of your items. I think it makes sense to do so if you have a lot of nice things. If you choose to do so, aim for estimates, rather than precise values, to make your life easier.
Why it is so important to acquire assets.
Assets can, but don’t always, appreciate (increase in value) over time. For example, a property may appreciate over the long term, but a typical car will do the opposite and depreciate (lose value over time).
Assets can also generate income, but don’t always. A good rental property should generate monthly cashflow. A stock portfolio can generate dividends (payments from companies to investors).
On the other hand, a designer bag won’t generate income, unless you charge people to borrow it. Even so, a designer bag is still considered an asset because you could exchange it for money.
To state the obvious, owning assets is a very good idea. Especially assets that appreciate and assets that generate income.
When you own these types of assets, your net worth will increase over time without much extra effort on your part. You don’t have to specifically trade your time for money with these types of assets.
Think of it like this: the best way to achieve financial independence is to own assets that increase in value over time and generate income.
By tracking your net worth each month, you’ll know how your assets are doing.
Does my home count as an asset?
Some people, like personal finance legend Robert Kiyosaki, don’t think you should count your home as an asset. The argument goes something like, “You can’t really sell your home because then you wouldn’t have anywhere to live. So, you shouldn’t count it as an asset.”
I couldn’t possibly disagree more.
For many of us, our homes are our most important purchase in our lives. Over the long run, most of our homes will appreciate in value, even if not as much as we hoped.
We spend years working to make money so we can pay down the mortgage. Each payment we make reduces our debt and increases our equity in the home, thereby improving our net worth.
Don’t overcomplicate it. Include your home as part of your net worth. Just don’t forget to include the mortgage as a liability (we’ll discuss below).
How do you determine the value of your home for purposes of tracking your net worth?
Make it easy on yourself. The goal is to obtain a reasonable estimate. If you’ve worked with a real estate broker, ask her for the current value of your home. She will use recent “comps”, meaning similar comparable properties in the area, to come up with a fair value.
You can also make a decent estimate of the value of your home by studying comps yourself. Platforms like Redfin or Zillow make it easy to see what homes have sold in your neighborhood.
Look for homes as similar to yours as you can find. Focus on size, the number of bedrooms and bathrooms, and the quality of the finishes.
Remember, this is not an exact science. We’re aiming for an estimate of your home value only for the purpose of measuring your net worth.
On our family balance sheet, I only update the estimated value of our properties once per year. That’s good enough for me, and all you really need to do.
Now that we know what assets are, we need to figure out what liabilities are to calculate our net worth.
What are liabilities?
A liability is any debt or obligation that you owe to someone else. Liabilities are most commonly found in the form of loans.
Unlike assets, liabilities diminish your overall net worth.
To speed up your path to financial independence, focus on reducing or eliminating liabilities.
My family’s current liabilities include:
- Lines of credit
- Mortgages
Other common examples of liabilities include:
- Credit card debt
- Student loan debt
- Auto loans
- Personal Loans
- Consumer loans
When you are beginning your career, it’s common for your liabilities to be greater than your assets. This is usually because of student loan balances.
Remember our real life, really lost boy? He had a negative net worth for years.
Don’t let that discourage you from tracking your net worth. Even if you’re in negative territory, each month is a chance to shrink that negative number, which means your net worth is increasing.
Whether you are paying down debt, or adding to your savings or investments, the result is the same: your net worth increases.
The reason for tracking your net worth also remains the same: individual progress, over time.
Now that we know what assets and liabilities are, we can create our balance sheet and determine our net worth.
Creating your own net worth balance sheet is very easy.
I’m happy to share the spreadsheet I currently use to track my net worth. Subscribe to our weekly email newsletter, and send me a reply to the next email asking for my net worth spreadsheet.
On the top of my family’s net worth spreadsheet, each row represents an asset, or something we own.
On the bottom of the spreadsheet, the rows represent the debts we owe.
Each of the 12 columns (one column for each month) in the spreadsheet indicates the value of each asset at the end of the month.
The reason I add a new column for each month, instead of just updating the values in a single column, is so I can easily see how our net worth has changed over time.
Once all 12 months for the year are filled in, I start a new sheet and repeat the process. This helps us track how our net worth has changed over the long run.
Since your balance sheet is for your eyes only (or your family’s eyes), feel free to design it however you want.
On our family spreadsheet, I use different colors to illustrate the different types of assets we own and liabilities we owe:
Turquoise for securities (stocks and bonds). Orange for checking accounts. Purple for savings and objects (like cars and jewelry). Green for properties.
I like color coding because it helps me quickly visualize what we own or owe in each broad category.
Here’s what a simple balance sheet looks like:
If you want to create your own balance sheet, here’s what it might look like:
| Assets | January | February | March |
|---|---|---|---|
| 401(k) | |||
| Roth IRA | |||
| 529 College | |||
| HSA | |||
| Checking | |||
| Savings | |||
| Car | |||
| Home | |||
| Rental Properties | |||
| Total |
| Liabilities | January | February | March |
|---|---|---|---|
| Credit Cards | |||
| Mortgage | |||
| Student Loan | |||
| Auto Loan | |||
| Total |
Once you input the amounts for each cell in the appropriate column, use the “sum” function to total your assets and separately total your liabilities.
Then, all you need to do calculate your net worth is create one final row labeled “Net Worth”.
In the “Net Worth” cell, simply use the “sum” function again to subtract the liabilities total from the assets total.
| January | February | March | |
|---|---|---|---|
| NET WORTH |
That’s all there is to it. Now, you know your net worth.
Tracking your net worth is the best way to measure your personal financial progress.
By now, you should be thinking that it’s not too difficult to track your net worth.
It takes my wife and I less than 30 minutes each month to track and talk about the most important number in personal finance.
How can we spend so little time on the most important number in personal finance?
Because we’re only looking for progress compared to what our net worth was previously.
If our net worth is increasing over time, it means we are heading in the right direction.
It means that we are continuing to fuel our Later Money goals. We’re paying down debt. We’re letting our investments do their thing.
If our net worth is decreasing, it means we need to consider making adjustments.
Sometimes our net worth decreases because the markets are heading down. If that’s the case, we don’t do anything. At this stage in our lives, we can afford to wait for the markets to tick back up.
If the issue is that our debt is increasing, or we haven’t fueled our investments that month, we make adjustments.
By studying our net worth each month, we can catch these setbacks before they become a continuous problem.
That’s all there is to it.
All before the kids wake up.
Do you currently track your net worth?
Have you found it useful to measure your overall financial health.