If You Want to Build Wealth and Be Financially Free, Track Your Net Worth

“If you are born poor, it’s not your mistake, but if you die poor, it’s your mistake.” — Bill Gates

When we say the term “net worth,” it’s usually in the context of Googling the net worth of Jeff Bezos or Donald Trump and wondering why we live in a world where they get to have billions of dollars while we struggle to pay off $1,000 of credit card debt. But this stodgy accountant’s term has more use to us than just helping us understand global income inequality.

In case you weren’t aware, the term “net worth” means the sum of all your assets and liabilities. That’s everything you own, from cash to a computer to a house, minus everything you owe money on, from credit card debt to student loans to an auto loan to a mortgage. The sum of these two values is your net worth.

Net worth has a reputation for being the kind of thing millionaires worry about — but if you want to have more money than you spend and retire well, you should be worrying about it too.

As anyone with a pulse can tell you, pursuing money is not the point of life. Money is only a tool that enables us to make the most of our time on earth. You should care about your net worth because your net worth measures how well you’re making use of that tool.

Your net worth is to your financial health what your vital signs are to your physical health. Just as your heart rate and blood pressure indicate to you whether your body is working well or not, your net worth indicates whether your financial life is stable or not. And much like how a physical body that’s unhealthy can’t handle sickness, a financial life that isn’t stable can’t weather unexpected expenses.

A financial life that’s in good health has a steadily growing net worth, or a net worth that only goes down for pre-planned expenses (like college) and then recovers. A financial life in poor health has a net worth that only goes down, down, down.

Most people are aware they ought to keep a little money saved for emergencies and not rent an apartment that’s too expensive for their income level. They think that’s enough for financial health and that they don’t need to worry about their net worth. But knowing and obeying these isolated financial guidelines doesn’t ensure you’re making the best use of your money.

An example: For nearly all of 2020, I maintained a very healthy savings rate. Nearly a quarter of every paycheck of mine went toward a savings account. But you know what I also did? Bought lots of takeout and Amazon store goodies with my credit card. I dove into a cycle where I would save a lot of money, only to take that money out of savings to pay down my credit card debt two months later. Then I would rack it up again. Rinse and repeat.

I thought this was fine because I always had savings and I was always able to pay down my credit card debt. It was only after doing a year-end financial review (and reading a few finance books by smart people) that I realized I spent a lot more money than I thought thanks to credit card interest and the psychology of credit cards.

If I’d been tracking my net worth, I would have spotted this problem after only two months. Tracking my net worth would have showed me that despite aggressively saving, my net worth was declining every month, and I would have been forced to ask myself why. Instead, this problem went on nearly an entire year before I realized what was happening.

Tracking your net worth is easy. It’s just a few steps:

1. Download a budget and expense tracking app that displays a readout of your net worth (or make a spreadsheet manually if you like that sort of thing). I recommend Mint.
2. Make a spreadsheet on Google sheets with two columns: Date and Net Worth.
3. Set a reminder on your phone to log your net worth in that spreadsheet every two weeks or one month.

Slowly, trends will emerge. You will see whether your net worth is continuously going up or going down, enabling you to adjust accordingly.

Tracking your net worth is most powerful over the long run. It’s only over a period of years that you begin to see the powerful effects of cutting expenses, eliminating credit cards, and saving wisely. By tracking your net worth, these abstract numerical modifications become concrete realities.

Merely tracking your net worth isn’t enough to make you a millionaire. But if you want to make the most of all the money that comes in to your life, tracking your net worth is the only way to comprehensively understand your finances. You can’t build wealth without keeping an eye on this measure of financial health.

“Millions wish for financial freedom, but only those that make it a priority have millions.” ― Oscar Auliq-Ice

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