As an investor, you should have only one goal: To increase your Net Worth over time. Unless you regularly evaluate your net worth (Total Assets minus Total Liabilities), you will not know what financial direction you are going in.
As a personal finance tool, net worth is essential. It’s the ultimate measure of financial health. By comparing your net worth on a regular basis you can get a good feel for your financial well-being. If your net worth is rising, you’re probably in good financial health. If you’re net worth is shrinking, you’ll want to take a closer look at your finances to see what’s wrong.
You can also use your net worth to help you reach your long-term goals. For instance, suppose you used a retirement calculator to determine that you needed a net worth at retirement of say $750,000 and you’re 30 years away from retirement. By recalculating your goal and your net worth regularly, you can make sure that you won’t get to age 65 and realize that you won’t have enough to live on.
The big advantage to tracking your net worth is that it forces you to face your financial reality. If you’re not saving enough for retirement — or you’re going backward — you’ll know. And then you have the choice whether you’re willing to make necessary changes. I find it useful to calculate my net worth quarterly. My goal is to increase my net worth over the previous quarter, which means that either my expenses for the quarter were less than my income, and/or my investments have increased in market value.
Over the next couple months, pay attention to what you are spending your money on. Are you spending your money on something that is increasing your net worth or decreasing it? When you look at your mortgage payment it can easily change your point of view. I am now very happy to pay down my mortgage because every month it increases my net worth by over $500. This way of thinking is very powerful to help you achieve your goal of financial security and wealth.
There is one more statistic you need to follow – your Return On ‘Personal’ Equity, or ROPE. Much like a business ROE, your personal return tells you how much income is returned to you as a percentage of your equity. The ROPE measures your personal profitability by revealing how much profit you generate with the money you have invested by saving and paying down debt. The historic average ROE of the Dow Jones Industrials is about 11%. Can you beat that?
The exercise of calculating your Net Worth and ROPE is really powerful. It will help you consider every major purchase you make and every loan you take or investment you make. It will have you asking a very simple question… what am I spending my money on that is increasing my net worth or decreasing my net worth?
A simple Excel spreadsheet which you can use to keep track of your net worth is available on my Research Offers page.
Below is an image of the spreadsheet. The Asset/Liability categories came from my online research and long-term use of the spreadsheet. The worksheet totals your Assets and Liabilities; and calculates your Net Worth and ROPE for you. Keep using the spreadsheet for years and it will help you reach your financial goals.
Here’s a close-up to show how the mechanics of your Return On Personal Equity might look:
Have you ever read a Berkshire Hathaway shareholder letter? The first page of Warren Buffett’s letter is a comparison of how the stock has done compared to the S&P 500 index each year since 1965. Only Buffett does not compare prices, he compares the change in Book Value (which is a stock’s net worth, ie. Assets minus Liabilities). Buffett knows that over the long term it is your net worth that matters.
2 Questions to ask Yourself Before You Buy:
- Does this product improve the knowledge of your own financial situation?
- If you purchase this spreadsheet, will you use it soon?
If the answer is YES to these questions, then I promise you will be satisfied with your purchase.
Again, this net worth spreadsheet is available on the Research Offers page.
“Your net worth to the world is usually determined by what remains after your bad habits are subtracted from your good ones.”
— Benjamin Franklin