Your Net Worth: The Only Figure That Really Matters

in Investing by

When it comes to material and financial wealth, looks can be deceiving.

Cheap and plentiful credit makes it easy for anyone to live beyond their means, and complex financial maneuvers can hide a lot. Simply put, the financial lives of many Americans are nothing more than smoke and mirrors, and what you see isn’t always what you get.

Most people can find examples of this artful deception well within their inner circles; the brother who lives paycheck to paycheck but still drives a Range Rover. The college friend who makes low monthly payments on her Birkin handbag. {Related: The ROI of Bling}

With enough money – with enough credit– almost anyone can construct a fantasy lifestyle…at least for a while.

But the bill will come due eventually; it always does. And when that day comes, the house of cards can fall quickly.

Building Real Wealth One Stone at a Time

Of course, not everyone buys into the illusion, and many of us want our wealth to be palpable; we want it to be touchable. We don’t care if our wives have the biggest rocks on their fingers or our kids go to the finest private schools.

Why? Because we want to build genuine wealth. And we know that, despite what the Joneses want us to believe, real wealth can’t always be seen.

Unfortunately, building the kind of wealth that will help you retire isn’t as sexy as pulling into your neighborhood in a new $80,000 BMW i8. It’s not as impressive as telling your manager about your weekend getaway to St. Barth’s – a career limiting move if there is one. It’s not water cooler talk.

But, at the end of the day, real wealth is the only wealth that matters. And that’s why it’s important to find a way to monitor our financial progress in real time – to measure our actual wealth in numbers, figures, and charts. But to do it right, we need to monitor what we really have, not just what it looks like we have.

Fortunately, measuring our real wealth is easy, and the most accurate way to measure it is by uncovering our unique “net worth.” The good news is, you can track it easily on your own. Here’s how (and why you should).

How to Figure Out Your Net Worth

Net worth is defined as the amount by which assets exceed liabilities. In other words, it’s what you have minus what you owe. And for most people who owe a lot, it’s not much.

If you want to figure out your net worth, you need to tally up all of your assets and liabilities and compare them. You need to take the time to estimate your assets that adjust frequently – things like real estate, brokerage accounts, and your 401K. And likewise, you should always be honest about what you owe. Every debt, no matter how painful, needs to be acknowledged if you want a clear picture of your net worth.

Obviously, another way to find your net worth is to sign up for Personal Capital and let us do the heavy lifting. All you need to do is link your accounts – all of them – and let the software work its magic. Once you do, you’ll have your net worth in front of you with minimal effort. And the best part is, the information updates every day, so no complex recasting each time your 401K gets a boost or you make a hefty contribution to your long-term savings. {Related: Why Personal Capital?}

Why Knowing Your Net Worth Matters

In a world where wealth is measured in all sorts of ways, it’s more important than ever to take stock of your own wealth in real terms. Here’s why:

Knowing your net worth lets you compare yourself to others– Comparing your wealth to the wealth of someone else is nearly impossible for all of the reasons mentioned here. Simply put, those who have a lot may be deep in debt, but they’ll never tell you! On the other hand, measuring your net worth allows you to compare yourself to the net worth of others, or at least to the average net worth for your age or income bracket. Take a look at the chart below which features median net worth data by household earning quintile and age:

Census Bureau Net Worth- Fool.com 2

Source: Fool.com

How do you compare? You’ll never know until you know your own net worth.

Your net worth helps you measure your progress over time- Having multiple investments and income streams is a good thing, but it can also make it difficult to track your progress over time. After all, most of us have our money spread all over the place, with multiple functions to measure gains and losses and a log-in for each. Meanwhile, tracking your net worth with an online platform like Personal Capital will merge all of your personal financial information into a format you can easily understand. Track it closely and often and an accurate picture of your progress will emerge over time. {Related: What We Measure, We Can Improve}

Your net worth allows you to focus on the big picture- Measuring your financial progress is huge, but it isn’t the only reason to track your net worth. We all know how investments can pull on our heartstrings; we’ve all seen how the ups and downs can leave us on the edge of our seats. Once you start tracking your net worth, you are no longer held hostage by the inevitable bumpy roads that lie ahead. Tracking your net worth forces you to step back and take a look at the big picture. {Hint: If your net worth is going up, you’re in a good place.}

Tracking your net worth helps realize the impact of your debts- Investing and building a portfolio of assets is the best way to build real, long-term wealth. But what about your debts? It’s easy to see your debt load as a consequence of your success, but that isn’t always the best course of action. Fortunately, tracking your net worth has a way of putting those pesky debts into perspective. If you want to see for yourself, drop $15,000 for a weekend in Vegas and watch your net worth drop like a rock. If you use Personal Capital, your credit card balance will automatically update when you do – and not even you can hide from it.

Building Something Real, Something That Will Last

Most people get joy out of spending their money. That new gadget – that shiny ride – provide them with a surge that is impossible to replicate anywhere else in their lives.

But the joyride will come to a screeching halt eventually, which is why most people are always lusting after the next big, shiny thing. And you can hardly blame them. After all, we are sold these stories our entire lives. We are told that, to be successful, we need to look the part. We need the car, the house, the vacations, and the lifestyle. Because without those things, we aren’t really living.

But all of those stories are a lie – a clever marketing ploy – aimed at boosting consumption and parting us with our dollars. The worst part is, many people don’t figure that out until there is almost nothing left.

But it doesn’t have to be that way.

Building real wealth – the kind that provides for your family and allows you to retire – doesn’t come with those euphoric highs, but it doesn’t come with tragic lows either.

The key is knowing the difference. But for those of us who do, real wealth is the only measure that has ever mattered.

Photo Credit: Pixabay

Start Tracking Your Net Worth With Personal Capital Today

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Holly Johnson

Holly Johnson is a financial expert and award-winning writer whose obsession with frugality, budgeting, and travel plays a central role in her work. In addition to serving as Contributing Editor for The Simple Dollar, Holly writes for inspiring publications such as U.S. News and World Report Travel, Personal Capital, Lending Tree, and Frugal Travel Guy. Holly also owns two websites of her own - Club Thrifty and Travel Blue Book. You can follow her on Twitter or Pinterest @ClubThrifty.

19 comments

  1. Steve Ura

    If you can buy a BMW i8 for $80,000 then JUMP at the opportunity. Even if you don’t want it, you can sell it the next day for it’s real value and almost double your money. Now THAT’S the way to build wealth!

    Reply
    • Holly Johnson

      Let me know how that works out for you! =)

      Reply
      • Charlie Russell

        HaHa. Yea I want to get in on that too.

        Reply
    • Dan

      Agreed. I’ll take 2 for that price!

      Reply
  2. Gen Y Finance Guy

    I have been steadily building my Net Wroth since graduating college. In the early years as I paid off student loans it seemed to barely move, but then all of a sudden I started to notice I was making exponential progress. I just recently started tracking this publicly.

    Until recently I had always focused almost entirely on income, but realized that this was only one side of the coin. Now with a focus on both, I hope to build my Net Worth even faster. Platforms like Personal Capital make it way easier to track of everything.

    Cheers!

    Reply
    • Holly Johnson

      I agree! It sounds like you are doing awesome.

      Reply
  3. Anonymous

    Holly, what Steve means is that a BMW i8 cost $145,000 so if he could get it for $80,000 he would and sell it for higher

    Reply
    • Holly Johnson

      Hey, thanks for explaining. I drive a $4,000 Dodge Caravan so I wouldn’t know! =)

      Reply
  4. Tamara

    The subject of net wealth is interesting because typically, when people think of wealth, they think high income. And with high income comes high consumption. Ergo, if you’re rich you’d better look it, correct?

    I dress simply and drive an old car. The assumption is that I’m a poor young person. Occasionally, I find that my deceptive appearance means I demand less respect in public (i.e. salespeople don’t rush over to help me). Frankly I love it because who the heck wants to be sold to all the time? The only thing I really want to buy with money is financial freedom. Don’t get me wrong, I’m nowhere near “rich”. But I’m above the median and average as millennials go (above the median even in comparison to older people). It’s so strange to me when hyper-consumers brag about their nice stuff and simultaneously complain about their lack of funds in the same breath.

    Reply
    • Holly Johnson

      We’re the same way. We drive old cars and live in a nice but modest home. Salespeople definitely don’t rush over to us, but I don’t mind. I don’t want to buy anything anyway.

      Reply
      • rodrigo Barahona valenciano

        This is great stuff Holly. I don’t make much, 29,000 a year but I truly believe that if you keep life simple and figure out ways to put what you make work for you, slowly but surely great things can happen. Thanks for the advise here.

        Reply
  5. John Knox

    At age 75 I have managed to accumulate with the aid of some inheritance of about two million. However I still worry abount allocation and world politics. I could loose it all.

    Reply
    • Momma

      John, I hope you do enjoy yourself, (we are not promised tomorrow) but also that you have a will and do something worthwhile with your accumulations. My father in law did not have a will and left his whole family in a pickle to figure out what to do. Much of his wealth went to the tax man, sadly.

      Reply
  6. David

    To John Knox

    It’s easy to get caught up in the wealth but don’t let it consume your life. My father died at 75 and he was asking me about his investments the day before. Please enjoy your money and your life because truer words were never spoken that ” you can’t take it with you”.

    Reply
    • Charlie Russell

      So true John. But on the other side of the coin my dad is 92 and my mom is 90. Provided I do not get into an accident, I could live to be that age. I am old school like them; I do not want anyone taking care of me or put that burden on my daughter by living beyond my means. If I knew I was going in a few years than I could have a grand ole time.

      Reply
  7. Jack Seech

    Frankly, with the amount of identity theft today, I’m concerned about giving out my account numbers and passwords to anyone. What assurance can you give me that everything will be protected. Your program look just what I need. Being free makes me more than a little nervous. Do you have a BBB rating? Where do you derive your profit?

    Thank you in advance of your answer.
    Sincerely
    Jack Seech

    Reply
  8. Dad

    I certainly didn’t come up with this quote, however I use it on my kids all the time. “It is hard to look rich and be rich at the same time.”

    Reply
  9. Henry

    The Personal Capital tool is really good I wish I’d had it twenty years ago and also taken your advice, I would have probably been saving a lot more. One thing I wish I had done is put more money earlier into a401K, I feel kind of stupid now having paid income tax that I didn’t need to. Of course I’m going to have to pay tax on the income later, and am hoping my tax rate goes down.

    Now if there were just a way to look into the future and see what the stock market is going to do in the next ten years…

    Reply
  10. Dan

    Well this has been an interesting article. But I believe frugality and thriftiness and stealth wealth are the keys to building my net worth higher. Its all to easy to fall into the consumer trap and forget building wealth. But by living beneath your means not above is the only way to truly build your net worth! Your article is intriguing because someone buying a BMW at 80,000 instead of using that money to build their net worth I think is a fool. An a fool an their money are soon parted. A much better value would be a car that is reliable and gets a great roi on your money at the pump. Like I drive a Prius an it gets 60 mpg, an 99 when I drive perfect. That BMW can’t give me the happiness that my car does, because I know its helping me build wealth. The BMW would only be a liability, I am not willing to deal with, regardless of my net-worth! My role model Warren Buffet drives modest cars, an lives in a modest house he bought for 40k a long time ago, before he was a billionaire! People lose sight of the true definition for building wealth comes from frugality and modesty in everything we do! Yes we have to have the essentials and make our lives suitable for us to live, but beyond that really whats the point! Building my net worth makes me much happier than any BMW ever could! Thank you, for the congratulations on me reaching this new mile stone on my net worth, I will continue to build! So many people who are athletes have negative net worths, regardless of the millions they make, because they haven’t been taught the skill its not how much you make, its how much you keep and for how many generations your wealth last! I am no expert but I do know the keys! Bye.

    Reply

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