Net Worth is how you keep score – not your credit card balance, your student loans, mortgage, or your credit score. It’s your net worth.
When I talk finances with someone for the first time, we start with Net Worth. It’s also the number I’ve tracked personally since 2014 (even though it was a negative number at the time). That’s where I’ll advise you to keep your focus and how you’ll budget for your long-term goals.
Net worth is assets minus liabilities, but that means nothing to 99% of people. It’s the language of accountants… overkill for your personal finances. You don’t need to get bogged down with complex definitions. For the purposes of your finances, things are positives or negatives… that’s it.
- Your car
- Retirement account
- Your home
Cash is the money you have in the bank today. If you’re going to include your rent payment in one month, you should try to include it in each month to be consistent.
A 401k plan is a positive. Your car is a positive, while the loan on it (if you have one) is a negative. Ditto for home loans.
Credit cards are negatives. Strive to pay off balances each month to avoid paying the high interest rates they charge.
The percent of your credit limit you’re using impacts your credit score and indicates your financial health, but it doesn’t impact your net worth.
Net Worth. This is where the money is… Literally.
We’ll set a goal for each month. You don’t always hit it, and some months you’ll actually move backward. Take notes as to why you had a good or bad month and it will assist with the budgeting next month and next year.
- Credit card balance
- Your car loan
- Student loans
- Your mortgage
So, let’s break down what happened in this example.
Look at the second column: cash increased (good thing), college and car loans both went down (probably due to regular monthly payments), credit card balances all went up, and net worth increased by $465 (from $1,239.36 to $1,704.36). Our goal was to increase net worth by $350 dollars this month and we exceeded that by $115. In future posts I’ll break down whether these are good or bad things, but the first step is to start tracking it. That’s why we start here… with Net Worth.