The First Step to Financial Independence: Know Your Net Worth

Financial independence is something that many of us secretly (or not so secretly!) long for, but have no idea where to even start. Unfortunately, unless you’re a trust fund baby, the recipient of a massive inheritance or a really lucky lottery winner, achieving financial independence at a young age may seem unachievable. It’s a daunting task, but by starting now and taking control of your financial future now, it will open up more options in the future. Most people can’t afford to retire at age 35, 45 or even 55, but with a little financial awareness and planning, many of us can shave a few years off our targeted retirement age and enter retirement with a strong financial picture.

Dreaming of Early Retirement while overlooking the Grand Canyon

So how does one get started on this mystical journey? The very first step to financial freedom is to analyze your current financial situation. Are you already in good shape? Buried in debt? It’s very difficult to make a realistic financial plan without knowing your starting point, so let’s get started!

How do I calculate my net worth and why is it important?

Essentially, your net worth is the sum of your significant assets (savings, investments, retirement accounts, house, other real estate, etc) minus the sum of your liabilities (mortgage, students loans, car loans, credit card debt, etc.).  It’s a fairly simple calculation that gives a snapshot of your current financial situation.

The real value of knowing your net worth is not as a standalone value, but to track how it changes (and grows!) from year to year. Many young professionals have a negative net worth initially and that’s 100% expected. College is not cheap (understatement of the year) and student loan debt is huge net worth factor for many millennials. Non-city dwellers may need to take out a car loan to purchase a vehicle for commuting to their job. We all make big and small financial decisions every single day and the long-term goal is to increase our overall net worth by making conscientious financial decisions that ultimately increase our assets and decrease our liabilities.

Simple Net Worth Calculation:

  1. Make a list of all your assets and add their values (Total Assets)
  2. Make a list of all your liabilities and add their values (Total Liabilities)
  3. Total Assets – Total Liabilities = Net Worth

My recommendation is to create a spreadsheet to track your household’s net worth and update it on a defined interval (monthly, quarterly or yearly, depending on preference) to view how your net worth changes over time. Below is an example of a very simple net worth spreadsheet that is updated at the end of each year. The spreadsheet formulas are shown below each calculation.

Simple Net Worth Calculation

For debts, also take note of the remaining balance, interest rate and any hard payoffs dates (or penalties for early payoff).

If you want to play around with a spreadsheet, feel free to start with this example Net Worth spreadsheet available on Google Docs. You can save a copy and modify for your own personal situation. The top section also includes an income summary if you want to track salary progression year-to-year.

In the Saverdink household, we tend to err on the conservative side for most of our finances, including our net worth calculations. We use a very conservative house valuation to offset fluctuating home values and to account for realtor fees and last-minute repairs that would be required if we were to sell our home. We do not include vehicles as an asset in our net worth calculation (but we do include car loans!). Cars are a depreciating asset that require regular maintenance, repairs and/or registration fees each year. We choose to keep our vehicles until they are not worth repairing, so by the time we “sell” them, they aren’t worth much.

Back in 2010, we started tracking our net worth on a yearly basis and it’s been really interesting to see our financial gains over time. I love the flexibility that spreadsheets allow and we’ve added rows to track our gross incomes year-to-year, as well as to calculate the percentage increase of our net worth each year. Not gonna lie… I get pretty geeked out every time we cross a  major milestone, whether it’s our income or net worth, and it keeps my motivation high for achieving financial independence even sooner. Just a few months ago, we crossed the $1M threshold for net worth and we can’t wait to double that number!

Personal Capital is an excellent (free) tool for aggregating your financial accounts and automatically viewing your net worth. In addition to automatically importing bank, retirement and investment accounts, it allows you to manually add assets or liabilities, such as your home value.

Ready for the Next Step? Learn How to Create a Budget

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