But how do you know if you are really making progress?
A great way to track your financial progress is by periodically creating a net worth statement. It might sound complicated but really it’s very easy to do.
What is a net worth statement
The financial definition would be your net worth is all of your assets minus your liabilities. Translated to simple english all that means is you make a list of everything your own (assets). Subtract all of your debts (liabilities). What you are left with is what is called your net worth.
I would recommend that you do this at least once a year. I’m nerdy enough that I do ours once a quarter, but you don’t have to do it that often.
List everything you own
First you want to list your assets. This would include things you own as well as all savings and investments that you may have. It would include things like:
- Your home
- Savings accounts
- Your emergency fund
- Retirement accounts
- College savings
- Rental properties
- The approximate value of your vehicles (Kelley Blue Book is a good place to get this.)
- Any collections or personal possessions that have significant value
List the approximate value of each of these items regardless of whether you still owe on them or not. You’ll subtract those debts in the next step.
List your debts
The first step is to list all of your debts with the current amount owed. If you are working on doing the debt snowball then you probably already have most of this. You do not need to list regular monthly bills like utilities, insurance, groceries, etc. You do want to include debts such as:
- Car loans
- Student loans
- Credit cards
- Medical debt
- Personal loans
- Business debt if you are personally liable
- Any other debts
Calculate your net worth
Now total up those assets and subtract all of the debts. The number you come up with is your current net worth.
Be careful to not over complicate this. The first time you calculate your net worth, it might take a little longer as you have to spend some time gathering this information. But after that it really shouldn’t take more than 30 minutes at most to do this. The goal is to simply take our financial pulse.
What if I do this and I come up with a negative number? If you have a lot of debt it is possible that this might happen. Try not to be too discouraged. Just use this as motivation to work doubly hard at getting out of debt.
The power of the net worth statement
The real power of calculating your net worth is to continue to do it over time. If you are doing wise things: Spending less than you earn, Getting out of debt, Saving for both short-term and the long-term goals, you should see that net worth number gradually get better over time. Even if you start out with a negative number, hopefully in a few months or a year when you repeat the same calculation that number will be better. And the next time it will be better still.
This is the real benefit of doing a net worth statement on a periodic basis. It is like a measuring stick that gives you a measurement of your financial health. Particularly if you have a lot of debt, one of the dangers you will face is discouragement. You will reach a point where it may feel like you are not really making any progress and you might as well give up. But, even if your numbers are negative if you look at last year’s net worth statement and see that you were $30,000 in the hole, but now you are only $10,000 in the red, you can take encouragement from the fact that you are making progress.
When you are living day-to-day it’s often easy to not realize the progress you are making. If you are aggressively going after your debt I think you’ll find doing a net worth statement occasionally can be a big encouragement as you see those debts go down and the savings go up.
If you haven’t done a net worth statement, I challenge you to do one this week!
Photo credit: tjmwatson creative commons