Here’s the honest truth: a high salary doesn’t mean much if you have nothing to show for it.
You can make all the money you want, but if you don’t put it to work, you can still end up broke.
Unfortunately, we still live in a society where the almighty salary gets admired and treated like it’s the only indicator to “how well” someone is doing-financially.
And I think that’s bullsh*t.
A salary doesn’t tell you how well someone treats their money, it just tells you what their paycheck says.
It’s time to stop obsessing over salary, and start focusing on net worth.
Net worth is the true measure of your wealth, not your salary or credit score. Sorry to burst bubbles, but it’s true.
That’s not to say your salary is unimportant. After all, it’s definitely a challenge to build wealth on limited income. But if you look at what it really takes to become financially fit, it’s all about what you do with your money.
You need to be financially productive with whatever you make, and tracking your net worth will help you ensure that you are.
In this post you’ll learn:
- What Net Worth Is
- How to Calculate Your Net Worth
- Why, Where, and How Often You Should Track It
- The Role Salary Plays
- How to Grow Your Net Worth
Stop Obsessing Over Salary and Start Tracking Your Net Worth
What Is Your Net Worth?
Your net worth is a snapshot of your current wealth. Specifically, it’s the amount of money left after you subtract what you owe from what you own. In other words, if you were to sell everything you own at its current value, and then pay all of your debts in full, your net worth is what’s left.
Assets – Liabilities = Net Worth
What You Own – What You Owe = Net Worth
What Are Your Assets?
Your assets are what you own that has a monetary value. It’s important to note that “value” is based on what a buyer is willing to pay. Value is NOT what you originally paid, or what you think something is worth. I mean, in my mind, my Beanie Baby collection is worth $1Million, but a seller is probably only willing to give me $20. Sigh, one day they will be “in” again though, you just wait!
Assets can be broken down into three categories: monetary, tangible, and investment assets:
Monetary assets include cash and cash equivalents, such as cash, checking, and savings accounts. They can be quickly converted to cash without losing any value, which is also referred to being liquid. Think of your monetary assets as what you use for day-to-day management of your finances.
Tangible assets are property that you own and that you could sell for cash if you needed to. The value of many tangible assets can decrease over time, but it still has current monetary value. Your car, furniture, clothing, and jewelry, for example, are tangible assets.
Investment assets can include both tangible and intangible assets, but you generally expect them to grow in value over time and generate income. Think retirement/brokerage accounts, stocks, mutual funds, land, and other similar assets.
What Are Your Liabilities?
If your assets represent what you own, your liabilities are what you owe; aka debt.
Debts/liabilities can be either short term, which are debts that are to be paid off within a year, or long term, which don’t have to be paid off in full until more than a year down the road.
Your credit card balance, for instance, would be a short-term debt. While they give you the option to pay less than the full balance each month, they want that money sooner than later. Car loans and student loans on the other hand come with an expectation that you will take longer than one year to pay it.
How To Calculate Net Worth
Using the “own – owe” formula, calculating your net worth is pretty straightforward. Most of the work is figuring out what you own, how much it’s worth, and what you owe.
Make a list of your assets by asset type (monetary, tangible, investment), your liabilities, notate the current values, and then subtract liabilities from assets to give you a net worth snapshot.
To get the current values of your monetary and investment assets, pull current banking/investment statements. For tangible assets like your car, check out online resources like kbb to get an estimate. For your home, it may take a little bit more effort to get an accurate current value, but you can check out this website for tools to help you estimate your home’s value.
An example Net Worth statement:
Salary vs. Net Worth
Notice that nowhere in the net worth formula do you see a place for your salary.
That’s because while you certainly need income in order to be able to accumulate assets, it’s not the be all and end all. You can in fact have a strong net worth on a modest income just like you can make six-figures and be in the negative.
What it all boils down to is making the best possible tradeoffs and decisions in your everyday life. That means not spending every dollar you make, and using any surplus in your budget to support your financial future. In other words, put your money to work!
A person making $50K that can control spending and minimize expenses has an opportunity to pay off debt, and invest at an increased rate. Those investment contributions compounded over time can increase their net worth tremendously over time. Even just investing $200 a month can turn into over $250K over the course of a career.
Wealth accumulation will always come down to choices, not solely your income.
Why You Should Track Your Net Worth
Calculating your net worth gives you a snapshot of your financial health, and wealth. I say snapshot because your net worth will change. Actually, if you are invested in the stock market, your total net worth is constantly fluctuating since the value of your 401(k), mutual funds, and stocks are constantly fluctuating with the market.
Tracking net worth over time gives you an indication of whether or not you are headed in the right direction. So, if you are currently in the negative, or not where you would want to be, don’t stress. The main goal is to see it rise over time. Use it as motivation to continue to improve.
Keeping an eye on your assets and liabilities can also help you pinpoint areas of improvement. For instance, if your net worth statement indicates you are heavy on debt, you can consciously make future decisions with financial growth in mind.
Where Should You Track It?
There’s a number of ways you can keep track of your net worth, it’s really up to you to find what you’re comfortable with.
I’m old school, so I love Microsoft Excel, but there’s also 5 million apps out there to use. Both Mint and Personal Capital are free electronic methods to view and track your net worth, but I would recommend you do it first by hand so you truly understand it.
Like I said, I’m old school!
How Often Should You Check It?
Check it enough to be aware, but not so much that you drive yourself nuts. Remember, if you have money invested in the stock market via a 401(k), or similar brokerage accounts, your net worth is technically fluctuating every second. One bad dip in the market and your net worth might see a drop. Is that a reason to be concerned? No, unless you are retiring next month.
A healthy frequency would be at least every 6 months, but no more than monthly. Experiencing financial well-being is about being financially happy, healthy, and not freaking out about money. Those freak outs include not obsessing over indicators that can plummet from one bad week in the market.
Just focus on making healthy decisions that positively support your financial future and you will see growth.
How Does Your Net Worth Compare To Others?
It doesn’t matter. No, really, it doesn’t matter how you compare to others.
While you are on your personal financial journey, the focus is all on you. It’s all about improving on a periodic basis, not how you stack up to others. Everyone has a different mixture of assets, and reason behind their debts. To compare your journey to theirs wouldn’t be all that productive, just stay focused on improving.
How To Grow Your Net Worth
Ok, so by now you know what net worth is, and how to track it, but how do you grow it? If we look back at the formula of “Own – Owe”, we quickly see that there’s only two main variables: assets and liabilities. So, we can either increase our assets, decrease liabilities, or both!
Which way is the preferred way? You guessed it: both.
To get you thinking of what can apply in your life, here’s three ways you can increase your net worth:
- Save/Invest more of your income: Hang onto more of your income by reducing your spending. With that additional surplus, you can invest in income generating assets that will grow over time.
- Pay off debt: If you have outstanding short term and long-term debt, use the snowball or avalanche method to organize and attack your debts.
- Increase income: You can increase your income through raises and/or “side-hustle” income, but it will only help you if you don’t spend it. Put that additional income to good use by paying off debt, saving, and/or investing. Remember, making more means nothing if you are blowing the money.
Continuously look for ways to increase income generating ownership, and decrease what you owe.
To be clear, I am not anti-salary, or anti-income. That would be insane if I was.
Your income is super important to efficiently managing your finances.
But as a society, we need to stop obsessing over it like it’s all that matters.
Treat your money right, focus on what truly moves the needle, and keep growing.