Before we started setting yearly goals, our Net Worth was the only financial benchmark I tracked. As we started investing bigger portions of our salary (15-20% of our after tax income) it started shifting dramatically. At the beginning of 2015, we started focusing on specific yearly goals. Tracking our Net Worth fell off my priority list for awhile. Since starting this blog I have started tracking it again, the first time I pulled everything together my guess was off by 8K or 11%.
I was off by an embarrassing percentage for someone who cares about Personal Finance. But does knowing where we stand actually matter? Is there value in tracking a number you don’t have direct control over? Read on to find out!
What makes up Net Worth
The simplest definition is to subtract your liabilities from your assets. It is definetely possible to have a negative overall Net Worth (we did about 3 years ago).
I would expect recent college grads that have student loans and another form of debt (car loan, credit card, mortgage) have a negative net worth. Its not a great feeling, but not worth panicking over either. It can be turned around quickly with some basic financial changes
There is much debate on what should count towards your net worth, one example being your primary residence. I will save that whole debate for another time, this article’s primary focus is: Does tracking Net Worth add value? Should you set a yearly Net Worth goal?
The Value of Tracking Net Worth
Benefits of tracking:
- Proof your strategy is working – If you are paying off debt, saving or investing over time the trend will be in the right direction. Hint: Its up and to the right.
- Motivation – When I pull our numbers for our quarterly updates, it motivates me to do better. Even if there is an overall decrease, I can see the debt dropping and our emergency fund rising.
- “Magic Number” Tracking – Depending how you define Net Worth, or what assumptions you make, your “Financial Independence Magic Number” might be your Net Worth target.
- Asset Allocation – The only way to know if your asset allocation is in line with your strategy is to put everything together and figure out the percentages.
So, in short – yes, it does add some value. But…..
While it adds value, I don’t see it as a yearly goal
While I do see the benefit in tracking your overall financial position, it has never been a yearly goal for us. Watching even mini corrections take place in major financial markets (US and International alike) I don’t think the majority of people should list net worth as one either.*
Goals should be something you can control. Something you can give YOURSELF a pass or fail at the end of the year.
I prefer to look at it this way:
Net worth is a product of meeting many smaller goals (controlling spending, consistently investing, increasing your savings rate, etc) with some time poured in.
The biggest issue I see using Net Worth as the primary metric, is getting discouraged by a down turn. Branding the year a failure even if you saved/invested a significant amount of your income doesn’t sit well.
Speaking of Market Fluctuations
We have technically only invested in a bull market, there have been a few mini-corrections that can rattle a new investor. At the end of 2015 and beginning of 2016 there were 10% plus drops in major indices. Looking at the chart it was far worse than the mini Brexit dip.
Thankfully I have spent a good amount of my free time reading about investing and the major financial disruptions in the early 2000s and 2008. The corrections did not change our strategy and actualy provide investment opportunities.
Ignoring Market Corrections: Mental Tricks and Strategies
Dollar Cost Averaging
This works by investing at regular intervals into the same asset, best example would be the contribution to your 401K out of your paycheck. As the price of shares drop, you buy more at a lower cost. As the markets return (Historically it always has**) the value/volume of shares at a lower price boosts your overall account balance dramatically.
As you can see from the above example, shares were bought ranging from 25, down to 17 and back up to 21. Even though you are down 16% on your first purchase at 25, overall you are profitable. If you stopped buying at $20 you would have left a lot of $ on the table as the price returns.
Balanced Investment Strategy
We split our investments across 401Ks, Roth IRAs, Emergency Fund (1% interest), Taxable Account, Employee Stock Purchase Plan, and a Family LLC.
We mostly invest in target date funds and total stock market funds with ultra-low expense ratios. Our 401Ks have a healthy mix of funds that cover all the different asset classes available to us.
Invest what we can afford
The chances of you losing everything if you have a balanced investment strategy are very, very slim. But there is still some truth to the saying “don’t bring what your not willing to lose.”
I look at it this way, if our investments go south, we are still going to be able to afford our house, cars, groceries, insurance, and maintain our standard of living (although we would pull back if it got really ugly).
Find a balance that makes sense for you. Then reduce some spending to shift the investment % higher over time.
Ultimately, I think there is much more value in setting specific yearly goals vs monitoring Net Worth. Even though their is value in tracking it, I feel like it steals the show and takes attention away from the work that goes into making the number happen.
Some may ask……… But why do you track your Net Worth Mr AE?
Part curiosity…Part proof…..And I think it will be a good story to tell as time progresses. I mean, it is interesting data for personal finance nerds to looks at.
However, For the foreseeable future our yearly goals will be our primary focus. That is how we grade our performance for the year and 99% of our time will go into creating, tracking and hopefully hitting them year in and year out.
Sooner than later I will take a stab at our Financial Independence Magic Number. After that I may start overlaying our Net Worth on that target and make some wild Way-To-Soon predictions.
Do you think Net Worth should be a goal? Is there value in tracking it? Do you agree with my thoughts that smaller yearly goals are more important to spend time on?
*Assuming the majority of investors hold investments that fluctuate (stocks, bonds, real estate) and do not have the majority of their money in guaranteed investments (CDs) or cash.
Some products that can help you:
Personal Capital: Personal Capital has a ton of great Free features, you can track your spending, net worth and even analyze your portfolio. It has top notch security and I am able to connect all of my accounts. Saves a ton of time!
Bluehost: Starting a blog has been one of the best decisions I have ever made. If you are interested in starting your own site, I recommend using Bluehost. Super easy WordPress installation and they have some great starter packages that bundle domain name, hosting and email.