When I started this journey I had very little understanding of my net worth. I carried a large amount of debt and barely had any savings. This meant that my net worth was negative so I just ignored that fact and went on with living my life.

So many of us are in this situation. The things we buy tend to hold very little value and when carrying debt we rarely get ahead. This was my life for a long time. Even after I declared bankruptcy I did not make the necessary changes to increase my income and decrease my spending.

Now that I am tracking my net worth a lot more closely I am seeing the change. It has become a game for me. Each paycheck I pay down more of my debt and increase my contributions to my retirement.

Pandemic Helped Curtail Spending

At the beginning of the pandemic my net worth was barely positive, now I am looking at close to $84k in my retirement accounts and just about $33k in overall debts. Even in the past few weeks I have seen a noticeable increase in my net worth and it has begun to have an impact on me psychologically.

I began tracking my net worth using tools such as Mint or Personal Capital. These tools are great for combining all your accounts into one easy to use website. However I have found that a simple excel spreadsheet is easier to keep up to date.

Calculating your net worth is easy:

Assets – Liabilities = Net Worth

Although it can be a bit more complicated than that. We all know what constitutes a liability, basically anything that carries a debt; mortgage, car loan, personal loan, and credit cards are all considered liabilities. But the complications arise when you start to look at what your assets are.

What Constitutes an Asset?

If my car is worth $20k and I hold a bank note for $10k does that mean I can claim $10k towards my net worth? Probably, but automobiles are depreciating assets and therefore what the value is today changes rapidly. A home can be a different situation. In most markets housing prices go up, so most likely the house appreciates.

As you pay down your mortgage you should have equity in your home to use to calculate your net worth. Since I rent and do not own a home my net worth does not include this type of asset and therefore it is easy to calculate.

Whether buying a home is a good investment for me is yet to be determined as my plan is to have enough money to move out of the country within five years. This puts me in the gray area of the possibility of not having enough equity in the home when I go to sell.

Simple Net Worth Calculations

For me my assets are my bank accounts, my investment accounts and my retirement accounts. My company uses Empower so I use their tool to determine what I would need to retire. This helps me with increasing my current net worth.

If I am going to be able to retire using the 4% rule, I need to have $1.5m to live a similar lifestyle. With the 4 percent rule you add up all of your investments and withdraw 4 percent of the total in the first year. The subsequent years you account for inflation in your spending.

Looking now at my net worth I realize I still have a long way to go but at least I started this now. Having more assets than liabilities allows me to relax a bit and put more money into savings. It also helps me realize that this will continue to grow.

Budgeting is Important But Not The Whole Picture

My first step in building a positive net worth was managing my budget. I realized that I was spending more than I earned. Even when I began making more money I just increased my spending. This led to smaller gains. Had I used all of the extra money earned to put into retirement and investments I would be even further along.

Budgeting is important to track spending, but it does not give you the whole financial picture. Your net worth is a glimpse of your financial future. Seeing it positive gives you a positive outlook. When it is negative it will help you try to turn that around.

Budgeting is also not always easy. Having a monthly budget and tracking every penny spent does not completely help you understand your financial well being. This is where it is important to calculate your net worth and why my attitude towards money changed in the past few years.

Lifestyle Creep

Two things that I did that decreased my assets when I increased my salary, rented a larger apartment and bought a new car.

The new apartment was necessary as the old place was small, gross and starting to become a bit more concerning with crime and other issues. However, the place that we chose was more than we needed. It has been great during this pandemic and work from home, it is just more expensive than what we ultimately should be paying.

We were planning on buying a house, but those plans have been put on hold largely because the housing market is too high. This led to us using part of the down payment to continue to pay off high-interest debt and increasing our assets.

Increase Net Worth and Save For a Home

I see many people saving for a down payment to get into a house while still carrying a lot of debt. This type of routine keeps us in that endless cycle of consumer spending. A house while it may be an asset, carries quite a bit of liability too.

The mortgage is one expense, but add in repairs, emergencies, renovations, property taxes and insurance and you may not put enough into savings to make it worth while. If the market takes a down turn then you have less money in the home than originally planned and no savings to turn to.

This was the other reason we put off owning another home. Our first home we barely broke even on the sale, our second we lost close to $50k because we were selling at the height of the financial crisis.

Whatever your situation is, calculating your net worth can help you understand your financials a lot better. When I saw the negative number I spent the last few years making sure I could turn that around. It helped me build a solid foundation for wealth and keeps me heading the right direction for retirement.

As a word of caution though, if you have a lot of assets in investments your net worth will fluctuate. Do not spend too much time worrying about this fluctuation and focus on the bigger picture.