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Understanding and Building Your Personal Net Worth Calculator
I've always been shocked to meet so many high earners in tech and finance who neglect to track their net worth. I've asked many of these people, who make well over $100K a year, "why they don't track their net worth" and the answer is usually "as long as I'm not spending more than I'm making, I should be good."
While I can't argue that spending less than you earn is a good strategy, I really think these folks are leaving a lot of money on the table by not tracking their net worth at all. There's a reason why companies do financial planning, so they can make better financial decisions, and I don't think it should be any different for an individual. As a high earner, daily expenses tend to not matter so much so they may feel like they don't need to track anything. In addition, after years of not tracking and seeing their bank account/investments continue to grow, it's a self perpetuating cycle that incorrectly validates their decision to not track.
I've noticed that as soon as these people try to make a bigger financial move in life such as buying a car, a house, starting a business, they tend to be caught off guard. They might not have as much as they thought or not as much of their net worth is as liquid as they thought. In the tech world, I knew many people who thought their networth was much higher than it actually was because they incorrectly thought they had more Bitcoin than they had. This is a true story!
The best part is that it's not really that hard to create a net worth calculator. This example that I created, which you can download, took no more than 30 minutes to make and is completely free to use so long as you have access to some spreadsheet software like Google Sheets, Excel, or Apple Numbers.
You could spend 15 minutes once a month or quarter updating it and you can see your net worth progress over the years.
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Why Track Your Net Worth?
Your net worth is a crucial financial metric, representing the difference between your assets (what you own) and your liabilities (what you owe). It's a financial snapshot providing a clear picture of your current financial position. Understanding your net worth is essential for financial planning, setting goals, and tracking progress over time.
Step 1: Identifying Your Assets
Assets include cash, investments, real estate, and personal property like vehicles or valuable collections. To calculate your net worth:
- List All Your Assets: Start with easily quantifiable assets like bank account balances, retirement accounts, and investment portfolios. Don't forget to include the current market value of your real estate and personal property.
- Determine the Value: For financial accounts, use the latest statements. For property, use fair market values or recent appraisal figures.
Step 2: Calculating Your Liabilities
Liabilities are debts or obligations, like mortgages, car loans, credit card debts, and personal loans.
- List All Your Liabilities: Include every debt, large or small.
- Determine the Amount Owed: Check statements or online accounts for the current balances on these debts.
Step 3: Building the Calculator
Using a spreadsheet, like the provided 'Net Worth Calculator.xlsx', you can easily build a calculator:
- Create Two Sections: One for assets and one for liabilities. Each section should have individual rows for different types of assets and liabilities.
- Input Fields: Allow for entering the value of each asset and the balance of each liability.
- Automatic Calculation: The spreadsheet should subtract the total liabilities from total assets to give your net worth.
- Updates and Tracking: Update values regularly and track changes over time, providing insight into how your financial health is evolving.
Benefits of a Net Worth Calculator
- Clarity: It provides a clear understanding of your financial situation.
- Goal Setting: Helps in setting realistic financial goals.
- Progress Tracking: Allows you to monitor your financial progress.
- Decision Making: Informs your financial decisions, like investments or debt repayments.
Conclusion
Understanding and regularly calculating your net worth is a fundamental aspect of financial literacy. A personalized net worth calculator is not just a tool but a roadmap guiding you towards financial health and stability. Regularly updating and reviewing your net worth can transform your financial planning, providing a clear path toward achieving your financial goals.