How to Use Net Worth to Measure Your Financial Progress

As humans, we often like to measure our progress and assure ourselves that we are improving. This is true in the realm of finances, as well as in other areas.

If you are trying to measure your financial progress, one way to keep track of how you are doing is to use your net worth as a metric.

Figure Your Net Worth

Your first step is to determine your net worth. This calculation is fairly straightforward. You simply add up all of your asset, and once that’s done, you subtract your liabilities.

Assets are items that represent positive cash flow. The value of your bank accounts, the value of your investment accounts, the market value of your home (if you own it), and the values of other significant items you own can be considered assets.

On the other hand, liabilities represent outstanding obligations. For most consumers, debt is the main culprit when it comes to liabilities. You need to add up all of your loans, including credit cards, student loans, what you owe on your mortgage, and other obligations.

If you have more assets than liabilities, you have a positive net worth. If your liabilities outnumber your assets, though, your net worth is negative. The goal when you have negative net worth should be to work toward turning things around so that you have positive net worth.

Measuring Your Financial Progress

Your net worth is a snap shot of where you stand at a specific moment in time. It doesn’t take into account your income and expenses; it deals with your financial picture right now. Over time, your net worth changes, depending on your financial situation.

Use your net worth to check in with your finances on a regular basis. I like to look at my net worth every quarter. On the same day every three months, I take a look at my net worth. If investments in my retirement account are doing well, and I’ve paid down some of the principal on my home loan, my net worth improves. However, if I’ve used my credit cards and I haven’t paid of the balances yet, my net worth shrinks.

For those who are trying to get out of debt, or for those who are trying to reach a certain goal, regularly assessing net worth can provide quick insight into what’s happening with the finances. You can watch your debt decrease and your net worth move closer to the black, or you can watch your net worth grow toward a level that allows you to meet your definition of financial independence.

Don’t rely entirely on your net worth for indications of your financial health, though. There are other things to consider, including your cash flow. Also, you can’t let fluctuations in your investment accounts bring you down in the short term. Even though net worth isn’t everything, using it as a measuring stick can be helpful as you formulate future goals, and as you measure your success thus far.

What do you think? Do you figure your net worth regularly as a way to measure your financial progress?

Image: Images_Of_Money via Flickr

About the Author

Miranda writes about financial topics for several web sites. Her blog is Planting Money Seeds, and her book, Confessions of a Professional Blogger, is available on Amazon.