There’s a lot of talk out there about earning passive income, generating multiple income streams, and achieving financial independence. The goal seems to be to achieve more income therefore ensuring all our financial woes will disappear.
The problem with this thinking is it misses the mark on what it takes to build wealth and achieve the next level of financial stability. Your income is not the only measure of financial success because earning money does not equate to building wealth (although it is a very crucial component). Setting goals and tracking your progress are what’s really required but often overlooked.
Those who work in corporate finance and avid investors often discuss balance sheets, but they’re rarely discussed in the personal finance realm. I think it’s time for those of us in the personal finance space to emphasize the importance of closely tracking your net worth or personal balance sheet.
Your net worth is essentially the net total of what you own (your assets) minus what you owe (your debts). It is by far the best metric for aggregating the progress you’re making towards your financial goals because it tracks both the growth of your assets (how much your home appreciates every year, how your portfolio or savings balances grew, etc.) and the reduction of your debts (how much your principal balance is reduced with every credit card, student loan, or mortgage payment).
While you might know exactly what your mortgage payment is, or how much you’re transferring to savings every month, seeing the total net effect of those actions can be a very powerful way to obtain clarity on your financial situation. It can also serve as a powerful motivator because it’s often a bigger number than just your individual account balances.
I recommend clients track their net worth at least twice a year, but quarterly is preferable as it keeps it front of mind, providing powerful motivation as your will power fades. You can do so in a simple excel spreadsheet, but I also think tools such as the Mint app are useful to track your progress. Below is a sample net worth tracking spreadsheet so you can get an idea of how it looks, and how motivating it can be to see your progress over time!
I invite each and every one of you to create your own net worth statement and to begin to track your financial progress. For those of you who do this and are met with the unfortunate surprise of having a negative net worth, please don’t despair. I first started tracking my net worth right after college, and it was five figures negative. I felt so discouraged and ashamed, and in retrospect, I wish I had just used it as motivation to push ahead and move it into the green. You’ve already taken the most important first step which is being aware of what you own and owe, and you can take steps towards moving into positive net worth territory. There’s a famous quote by Peter Drucker that goes “what’s measured, gets managed” and I think this is super applicable to personal finances.