Confession. I had never calculated my net worth until last week. And as I wrote that, it hit me how silly it is that I haven’t been tracking it since we began this journey ten months ago. I’m positive it would have made me even more motivated.
I had always heard financial gurus discuss net worth and the importance of knowing it, but for some reason, I just never felt compelled. It’s a calculation that is quite simple – the value of your assets minus your liabilities – but it’s a spreadsheet that I never felt motivated enough to put together, mainly because I did not want to devote the energy required to maintain it by logging into all of my accounts each time I wanted a current snapshot. This is a journey though, and I learn as I go.
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As I mentioned in my previous post, I have been reading The Millionaire Next Door by Thomas J. Stanley, Ph.D. and William D. Danko, Ph.D., which compiles extensive research done on the habits of millionaires. The authors define the threshold level of being wealthy as “having a net worth of $1 million or more,” before providing eye-opening comparisons of “PAWs” and “UAWs.”
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A PAW (Prodigious Accumulator of Wealth) is one who is in the top quartile for wealth accumulation, while a UAW (Under Accumulator of Wealth) is in the bottom quartile. How do you determine whether your a PAW, UAW or AAW (average)? The equation developed by the authors is this:
Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by ten. This, less any inherited wealth, is what your net worth should be.
Of course, everyone has very different backgrounds and situations, so it’s hard for me to wrap my head around “should be,” but of course, I’m curious.
So, before we find out what I am considered, let’s discuss why I believe it is important to know your net worth.
1. Your net worth is your financial report card.
It is difficult to determine if you’re moving forward without tracking your net worth. Since I am paying off large amounts of debt without going into more debt, I wasn’t too worried about this since it is pretty obvious I am moving forward. However, with just a little over $30,000 left to go, I need to go ahead and start tracking this.
2. Knowing your net worth means knowing how wealthy you are.
Your net worth determines the amount of wealth you have, not your income. Keep this in mind when you take that hit to your self-esteem when hearing how much a coworker or friend earns per year.
3. It keeps you in check for your BIG financial goals.
Want to have a healthy retirement that is free of financial worry and leave a legacy for your family? Focus on building your net worth.
4. It provides reassurance.
If you’re anything like me, you’re constantly wondering if you’re doing enough. Calculating my household’s net worth allowed me to give myself a well-deserved pat on the back.
In a continuous effort to prioritize my time, I decided to research tools that would make keeping up with my net worth much easier. This required a lot of letting go for me, as I am a control freak when it comes to my finances and do not generally use third party tools/apps/programs other than excel spreadsheets that I develop.
I had often heard about Personal Capital when listening to personal finance podcasts, and the reviews I read marveled at how easy this program allows you to track your net worth. I decided to check it out, and within a few minutes, I was kicking myself for not doing this much earlier.
Why did I choose this program?
1. The Ability to Link Financial Accounts
As I mentioned before, a big part of the reason I had not started calculating my net worth was that I didn’t want to have to log in to all of my accounts every time I wanted to update it.
This feature is SO convenient. It took me just minutes to log in to my accounts. It took a couple days, on the other hand, for me to log into my husband’s accounts since he tends to choose very different passwords for everything and as a result, has a hard time keeping up with them. In the end, I was able to link every single one of our accounts, with the exception of my husband’s state retirement program, which I added manually.
2. Zillow Home Value Estimate
This means that you can allow Personal Capital to link the “Zestimate” of your home’s value. Questioning the accuracy of this estimate, I did some reading and found that it can vary 10-20% from your home’s actual value. I’ll provide details of my experience with this in a few moments.
3. Miscellaneous Assets and Liabilities
Jewelry, art, vehicles, cash, investments, family loans, you name it – you can add as much as you would like.
4. Visual Aids
The dashboard shows graphs and charts tracking your net worth, investable cash, cash flow, budget categories, portfolio balance and estimated retirement goals. Since I do not use this program for any purpose other than checking my net worth, this is the only chart I am concerned with.
I do wish I had thought to wait until I had my husband’s account passwords before signing up. Waiting a couple of days to link his accounts caused a large spike in my net worth chart, which isn’t a big deal, it just bugs me.
5. It’s FREE
I mean, come on, I’m a tightwad. You can sign up for free, too! By signing up through my site, I earn a small commission at no cost to you. Click here to check it out.
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Without further ado, let’s look at my numbers. Below, I list the breakdown of my assets and liabilities. I’ll subtract the latter from the former to calculate my net worth.
+ Assets: $227,028
• Cash: $13,433.53
• Investments: $68,703.85
• Cars & Motorcycle: $6,932.00
• Home (Zestimate): $137,959.00*
*The estimated value of my home, according to Zillow, dropped $30K overnight from $167K to $137K. My husband and I estimate the value of our home to be in the $130K range, so this recent amount is much more realistic. Keep this fluctuation in mind if you choose to connect Zillow to your Personal Capital account.
– Liabilities: $32,546
• Mortgage: $32,546.82
= Net Worth: $194,481
Not too shabby! Let’s work the equation to see where I fall on the wealth accumulation scale.
(Age: 28) x (Pretax annual household income: $107,015) = $2,996,420 ÷ 10 = $299,642
This number, according to the formula in the book, is what my net worth SHOULD be. According to the equation, I am an AAW, an Average Accumulator of Wealth, not a PAW as I admit that I was hoping to see. I’m still patting myself on the back though. After all, there is no perfect formula when it comes to personal finance.
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Now that I’m set up, I’m so excited to watch my net worth grow. Since my Monthly Debt Payoff Reports are on the first of each month, I decided to begin releasing my Net Worth Reports on the 15th. Check back often to see how I’m doing!
Do you track your net worth? Comment below and let me know what you think!