Why does your car have a gas gauge?
Seems obvious, doesn’t it? As we’re heading down the road, we need to know how much fuel we have in the tank. If we have a goal (say, getting to the grandparent’s house for Christmas), we need to make sure we have enough fuel to complete the trip. Gas isn’t the goal, but it’s a means of achieving our objective.
It’s the same with our journey down the road of life. Money isn’t the goal in life. Rather, it’s the fuel that lets us achieve our goals. It’s best to know if we have enough fuel in our tanks to achieve our objectives. If not, we need to find a way to either increase our fuel or change our goals. To complete the analogy; In life, we spend our working years filling the gas tank, in order to have sufficient fuel in the tank to draw it down as we move toward our final destination in retirement.
In Part 3 of the Building Block Series, we’re going to focus on what I believe is the single most relevant “Gas Gauge” on your journey through life:
The Net Worth Statement
Simply put, the Net Worth Statement is simply a measure of your total assets minus your total liabilities. Put another way, it’s a measure of what is OWNED vs. what is OWED. An simplistic example of a personal Net Worth calculation is below:
I cannot reiterate strongly enough the value of tracking your personal net worth. I started tracking my family’s net worth in 1991 (at the young age of 28) and have tracked it every year-end since that time. At the time, I was just getting started in my interest of personal finance, and had read an article (similar to this one?) about the value of tracking net worth.
I decided to give it a try, and have never regretted that decision.
Every year in January, I simply type in the figures from my year-end statements from all relevant accounts. It takes minimal time, and by the time the last statement rolls in you have an updated net worth figure.
The value of the net worth statement is that it allows you to see your personal financial trends over time. Every decision you make through the course of the year will either increase (more savings) or decrease (more spending) your net worth. It’s encouraging to see the net worth grow year over year, and know the decisions you are making on a daily basis are resulting in real improvement in your financial situation. Your gas tank is slowly filling, and you can see the progress in your Net Worth statement.
Another advantage of going through the process of updating your net worth is the high level review of all assets you own, and all debts you owe. It’s a useful time to review the investments you have, and whether any changes should be made. While there are numerous web sites now offer automated Net Worth calcuations (e.g., Personal Capital, Mint), I still find value in updating my spreadsheet once a year. It’s also a good means of communicating to your family the assets you own, and would be a critical document for your loved one should you pass away (see Post #19 – Mortality).
Another interesting advantage of knowing your net worth – you can compare yourself to others. The following data from the US Census Bureau shows the median net worth by age. Data is shown with, and without, home equity.
I would argue that the median net worth is far from sufficient to fund an active retirement, but it’s an interesting comparison to see how you stack up. The following article is the source of the chart, and gives additional commentary on the net worth data.
Knowing your net worth is a key building block that all households should track. It helps keep you on track as you “fill your tank” through your working years, which is a fundamental requirement in your journey toward achieving a great retirement.
If you don’t have a personal Net Worth statement yet, I encourage you to copy the template I included above, and calculate your own Net Worth today.
How much fuel is in your tank?