When I began my personal finance journey some years ago, my hairline was better and one of my frustrations was the ever-nagging question—“Am I on the right path?” Our society teaches us to be hyper-consuming, credit score-keeping materialists. You’re reading this, so I probably don’t need to convince you that conspicuous consumption and over-use of consumer debt are low-thrust, high-drag paths to financial freedom and wealth. Yet, there’s no denying that a credit score of 758 is better than 458. And who better to judge numbers than fighter pilots, right? However, there’s a better number to focus on—net worth.
Net worth is simple— subtract what you owe from what you own. That’s your net worth. In financial geek-speak, it’s assets minus liabilities, but chicken-beef, same-same. Net worth is the gauge fighter pilots should keep their eye on. Not too often, sort of like the oil gauge on a pond crossing, but with reasonable frequency. Net worth is a great tool for assessing progress in your financial journey and checking your glidepath towards financial freedom/independence/retirement/etc.
How I Track My Net Worth
I love me a good spreadsheet, so Excel is my go-to product. I made my own, but there are gobs of freebees on the web. As you can from Figure 1., I list assets by type on the left, with liabilities at the bottom. Some simple Excel formulas tally up the assets and liabilities, then I can compare this year’s numbers to last year’s numbers as well as the percentage change. The raging bull market for the from March 2009 to March 2020 made the numbers pretty nice (except 2018), but of course markets (and therefore net worths) also go down.
What I Track
Figure 1. shows a very simple product. If it were too complex, I’d find a reason not to do it (I could always keep trying to click to the end of the Internet). I don’t break out investment accounts by ticker symbols, etc. I grab the numbers from my banks and brokerages, add them up for a given category, then plop them into the spreadsheet. No need to crush the atom with complexity. Should you include your kids’ college savings? I can go either way, but at least it gives me an easy reference for year-over-year changes.
Why I Track Net Worth
As I’ve said before, I believe building wealth is about achieving goals, securing a dignified retirement, eliminating money worries, and maybe even leaving a legacy. In my own financial plan, I know what net worth figure represents freedom from ever having to work for a pay check again. If I track net worth periodically, I can see if I’m on glidepath and make corrections or, just smile as required. I also find that it helps facilitate some annual financial discussions around the house. I do not track things like credit score. They’re irrelevant to financial freedom.
When I Track Net Worth
Updating a net worth statement once a year is sufficient for most households. The best time of year is generally late December since it’s sort of “financial hygiene” month. In December, mutual funds generally pay out capital gains, so you may want to be able to add them into your numbers. December is a great time to finalize contributions to any employer plans like a 401(k). December is the last month for making charitable contributions to affect tax liability. Taking a look at your year’s finances in December is also a good warmup for tax season in the new year. Finally, while you can still make IRA contributions until Tax Day in April, many people fund their IRAs in December when they know their final income numbers and can determine which type of account makes sense for the year (e.g., Roth vs. Traditional vs. Non-Deductible Traditional with a trip through the Back Door).
Is a Net Worth Statement Right for You?
You know what I’m going to say here—of course. In fact, if you have a negative net worth due to student loan or other debts, the net worth statement gives you reason to do your happy dance on the day you achieve a $0.00 net worth. (This is a big deal for doctors!) If you’ve already achieved financial independence from the need for a paycheck, maybe you can skip a net worth statement—but then again, you’re a fighter pilot, so why put your head in the sand and run the risk that your number is heading in the wrong direction at the wrong rate and wrong time? If you work with a financial planner that already provides this service then you should be set. Finally, December isn’t a magic month for Net Worth Statements. Any month will do to get started, so why not give it a shot today?
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