Now that the year is coming to a close and a new year is about to begin I always want to know how I’ve progressed over the last year and how much I’d like to progress over the next year. Financially, I use my net worth to measure how I’ve been doing.
Net worth is one way to measure how you’re finances have been doing over a period of time. However, in order for you to follow along with this exercise you need to know your personal net worth. I’ve already written about what net worth is and how to calculate it so if you need some help head over to that post first.
Know Your Net Worth
Knowing your net worth is key because if you don’t know your net worth you can’t measure your financial gains and losses in total. Sure you can say that your bank account has increased this year but if your loan balances have also increased you’ll get a false sense of accomplishment.
Your net worth is calculated by taking all of your assets and liabilities and netting them against each other to show how much money you’d have if you sold all of your assets and paid off all of your debt. This exercise will show your financial strength (or weakness) even though you aren’t likely to ever sell everything and pay off everything in one day.
If you don’t already know your net worth it can be a bit daunting to figure it out. You can break it down into steps instead of freaking out and avoiding the task all together. Find and account for all of your assets on one day and then find and account for all of your liabilities on another day. If this is even too daunting break assets and liabilities into even smaller sections such as bank accounts one day, investment accounts the next.
Analyze Your Net Worth
Now that you know your net worth it is time to analyze it. Look at the various accounts, investments and other items that make up your assets. Do you see something out of whack? Maybe you see that you have way too much cash on hand when you combine your 5 bank accounts you’ve opened and never consolidated. Maybe you have way too much money in stocks for your current risk level.
You might notice things look just fine. No matter what you find make sure your assets are where you want them to be for your goals. If not, work toward fixing it.
Next you should assess your debt. This, admittedly, is much less fun than scrutinizing your assets but could potentially be even more important. Figure out why your debt is higher than you thought it was. Have too much credit card debt? Work toward paying it off. Analyze which debt is costing you the most and try to figure out why you incurred that debt.
After analyzing your debt come up with a plan to get to your ideal debt level. My ideal debt level is debt free except for the mortgage. What’s your ideal debt level?
Set a Goal for Your Net Worth in the New Year
Now that you have analyzed your assets and liabilities you can now set a goal and begin to take action. The new year is just around the corner and I can’t think of a better time to get motivated to improve your financial situation. Set a goal to get your debt under control or to allocate your assets to your liking if your assets and liabilities aren’t optimized.
If you’re happy with the amount of debt you have (or don’t have) and you are happy with how your assets are allocated declare a goal to increase your net worth. This can be in terms of a percentage increase in net worth or an absolute dollar amount you’d like to reach. Many people shoot for the six figure mark ($100,000) or the seven figure milestone of $1,000,000. What is your net worth goal for next year?
Track Your Net Worth
Finally, you need to track your net worth. You went through all of this work calculate your net worth, analyze it and set net worth goals going forward but it will all be for nothing if you don’t track your net worth going forward. I calculate my net worth monthly but you don’t have to do it that often. Many people calculate their net worth quarterly or twice a year. Do what works for you.
Don’t just update your net worth either. After you update your net worth take the time to analyze your assets and liabilities and see how you are doing against the goal you set. If you’re improving, great! If not, try figuring out a way to improve the situation and get closer to your goal. Maybe you could announce your goal publicly to gain a little extra motivation!
I’m excited to start the new year off with a bang. I recently discussed my girlfriend’s student loan situation and announced our goal of paying her student loans off in full by the end of next year. What are your goals for your net worth next year? Do you track your net worth? If so, how often?