I have debated back and forth on including Net Worth in the FI Action Series and made the executive decision that it should be tracked. Done properly, with the right expectations, it *can* validate the decisions you are making and give you a one-stop look at your overall financial situation.
Why the hesitation?
There are potential negatives to tracking your Net Worth. The 2 main reasons I hesitate to recommend it early in someone’s Financial Independence journey are:
- What if my Net Worth is negative
It is entirely possible, especially for the younger crowd (Student Loans anyone?) for your Net Worth to be negative
- You don’t (and shouldn’t) have complete control of your Net Worth
You control the decisions, you control the actions, you control the allocations, but you don’t control the stock market returns. If the bulk of your money is invested, which is a must for 99.99% of the people that pursue financial independence, there will be spells where you don’t have control and have to watch the number drop.
I cringe at the thought of someone losing motivation because they have a low/negative Net Worth or by watching it drop due to market conditions.
That being said, we need to face our situation head-on, guessing doesn’t get us there.
Our Historical Net Worth Tracking
I started closely tracking our Net Worth in early 2016 (View our historical Net Worth page). Here are our most up to date numbers:
Initially, we included vehicles and our home which is fine, but I have shifted my focus to the actual Cash/Investment balances over time (very bottom row). We need our vehicles and a place to live, so as they sit today, they don’t provide any Financial Independence fuel.
My favorite part to look at is the quarter over quarter delta of our Net Worth and Investment balance. Since I started tracking we have been on a solid up and to the right path with double-digit increases every quarter. This will not last forever, unfortunately, for a few reasons:
- As the balance increases our contributions won’t have as big of a percentage impact on the total
- Since most of our money is invested, stock market drops will be larger than our contributions
Enjoy it while it lasts I guess?
Being able to reflect on the progress over time is a pretty cool feeling, I wish we would have started this sooner.
What to include in your Net Worth Calculation
A lot of this is personal preference, but the must-have items are:
- Investment accounts(401K, Roths,etc)
- Emergency Fund, Savings Accounts
- Debt (Mortgage, student loans, car)
There is some wiggle room on what you can include in this calculation, but here are some examples of what I don’t include:
- Engagement Ring (I don’t think Mrs. AE is going to cash that thing in)
- Other Sentimental Jewelry – My grandpa’s watch might be worth some cash, not really sure and don’t plan on finding out
- Electronics/Furniture – 99% chance this stuff with be worthless in 5 years
- 529 accounts – Unless you are planning an elaborate heist of your children’s money….
- Checking account – I don’t count the money until it hits our brokerage account, emergency fund or one of our various retirement accounts.
As I mentioned previously, I do have our home and vehicles in our spreadsheet, but I focus more on the Cash/Investment number as that is what will fuel/persist our Financial Independence status later. Up to you! Include whatever you feel like monitoring.
Action Item: Crack open the Financial Independence Action Series Template (Previous link will bring you to the most up to date version) and fill out the Net Worth tab. If you follow the template it will be pretty straightforward and even does the calculations for you. Do this at least every quarter!
Throwing a Plug for Personal Capital
Personal Capital is a Net Worth Tracking tool/App that links to all your bank accounts and aggregates the data. It is by far the easiest way to look at your asset allocation (something we will come back to later).
Using my fingerprint to see this dashboard in under 10 seconds is pretty amazing:
Action Item: If you want to track your Net Worth automatically, give Personal Capital a shot. If you want to do me a solid, use this link. (I may get paid if you use this, but love the tool so much you should go there even if you think I suck and don’t want me to get paid)