Five Reasons Why It’s Important to Know Your Net Worth

Do you know how much you’re actually worth? If the answer is “no”, then you might be doing yourself a disservice.  And not because you won’t be able to afford a multi-million dollar yacht or move to the Hamptons any time soon, but because you’ll be cutting yourself short in a few key areas where your finances could be improved.

Knowing your net worth gives you a complete snapshot of where things stand.   Do this enough times, and soon you’ll be able to stop some trends – either good or bad. Here are just a few of those important areas where tracking your net worth can be really helpful to your overall financial situation.

1- Motivation

By far: One of the best things for me to come of checking in on my net worth is what it does for my motivation.

A few years ago, I started playing this little game with my finances where every time I’d tally up my net worth, I’d then ask myself: Could I quit my job today and retire today based on what we’ve saved so far?  I would use the 4 Percent Rule to get a simple estimation of how much money I’d be able to withdraw each month.  As you can probably guess, each time I did this exercise, the results always told me that I needed to go back to my job the next day.  But even still: It lit a fire underneath me to make that number grow and grow!

2- Diversification

Most of us are okay starting off our 401(k) or IRA with just 4 or 5 funds.  But as our portfolios grow from 4 or 5 figures into 6 or 7 figures, the issue of diversification becomes incredibly more important.  This is something that a regular check-up of your net worth and the assets it holds can reveal.

What if your portfolio has reached $500,000, but you discover that it’s too heavily invested in riskier aggressive stocks?  With so much money on the line, does it make sense any longer to take on so much unnecessary risk – especially if you’re getting close to one of your goals?

Alternatively, what if you’d like to see your portfolio grow significantly over the next 15-20 years, but you find out you’re too conservatively invested in bonds.  Again, it may be time to re-evaluate your strategy and optimize your funds for better growth opportunities.

3- Attainability

Sometimes crunching your net worth might reveal that you’re a lot closer to reaching your goals than you previously thought.

I had a friend that thought that she and her husband needed a couple of million dollars to properly retire.  This was going to cause them to have to work for almost 20 more years well into their 60’s.

But was this really the case?  After a few simple questions about how much they had stashed away so far, we were able to figure out that they could probably retire about 10 years sooner than expected.  Needless to say, she was thrilled!

4- Choices

Having a handle on what kind of assets you have and where you can pull from might enable you to do things you never thought possible.

When my wife and I wanted to move to a new city to be closer to her work, after a quick analysis of our net worth, we discovered we were able to comfortably afford a much nicer house with a smaller mortgage than we had originally planned.  And we were able to do this without pulling from any of our retirement accounts or seeking any additional loans.

5- Protection

The last (but not least) thing to think about when it comes to your net worth is what will happen if tragedy strikes.  If you were to pass on, how will your funds be passed on to the people you love with the least amount of hassle and intervention from the courts?

Generally, this issue is easily solved with a simple will.  But if your net worth is of a sizeable amount, then it may be a better idea to invest the time in seeing an estate lawyer who can help you navigate through the legal system and make life for your beneficiaries less painful than it needs to be.

How to Calculate Your Net Worth

Figuring out your net worth is not as hard as you might think.  You can automatically do it using a free app like Mint or Personal Capital.  But be aware that services like this will need your user names and passwords to ping your financial accounts and pull your numbers.

If that freaks you out even just a little bit, then do what I do: Go old-school and use Microsoft Excel.  You can easily create a spreadsheet with all your assets at the top (savings, retirement accounts, house value, car value, etc) and all the money you owe listed at the bottom (mortgage, loans, debts, etc).  Subtract the total of your assets from the total of what you owe, and then there you have it: You’ve just calculated your net worth.

Author bio: DJ is the author of “Save BETTER!” as well as several other personal finance ebooks.  He is also the blogger behind the sites My Money Design and 1,000 Ways to Save; two places where you can learn a ton about how to optimize your saving and then use it to achieve financial freedom.

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