How Rich Are You?

Net worth is how much money you would have if you took the value of all your assets (e.g. car, bank account, retirement account) and subtracted the value of all your liabilities (e.g. loans, credit card balances, IOUs). Ideally, this is a positive number that goes up each month- meaning, you spend less money than you make. Sometimes, it can be hard to determine if you’re becoming richer or poorer, though: bills come at different times of the month, credit cards delay spending money, extra paychecks come during those months with 3 pay days, etc. By spending 20 minutes or so every month to calculate your net worth, you can easily tell if you’re spending more than you make and becoming poorer or richer.

NET WORTH = ASSETS + LIABILITIES
(remember, liabilities are actually a negative number)

Track Your Money, But Not At The Expense Of Having Some Fun

Sometimes, I might spend too much money on things like hiking The Inca Trail (Sacred Valley, Perú).

Personally, right now, I don’t like to track every dollar I have and worry about every penny I spend for lunch, at the store, or at the bar while I’m with friends. However, I do take a half-hour or less around the same time of every month and figure-out my net worth. Am I doing too much partying? If my net worth goes down one month it’s quite possible I wasn’t really able to afford buying all that beer for my brother in addition to putting that nice new piece of art up in my livingroom! And if my net worth goes up, perhaps I was just being too stingy and not really getting out and having enough of a good time! For me, it’s a careful balance of making sure my net worth steadily increases over the long term, but there are months like last November when I hiked the Inca Trail to Machu Picchu where my finances just did plain bad. The value of figuring-out my net worth, or better known by financiers and accountants as doing a balance sheet, is it gives me a quick snapshot of if I’m getting richer or poorer without having to meticulously track everywhere every dollar goes.

An Easy Method That Only Takes 20 Minutes Every Month
The process of creating a monthly balance sheet is fairly straightforward and simple. There are some differing philosophies of whether you should include your car, or your current credit card bill, etc., and my response would be do whatever seems to make the most sense to you personally. Also, it can help to do your balance sheet around the same time every month for accurate comparison purposes. Of course, if you do your numbers on the 30th of every month, but you get paid on the 31st that month, it may make sense to be flexible in your system and take that paycheck into consideration.

Paying Your Debt Makes You Richer And This Proves It!
Tracking your personal net worth is an easy method for ensuring you’re spending less than you earn, but an added benefit to this method is you feel richer as you pay down your debt. I know, personally, in the case of having student loans, I’m prepared to have them for the next 15 to 20 years and sometimes the large amount of money I owe can seem overwhelming. However, even if I don’t save any money this month, but pay $200 on my student loans, my net worth can increase by that $200 and it feels good! Remember, even if you have a bad month and don’t save money (which I would never recommend, but realize it happens sometimes) you are still going to show progress by paying down your monthly loans and other debts.

Winning Big Without The Lottery
One of the best realizations I had was when I learned many people get rich just by living below their means, not by winning or earning one big lump sum of money one day. Tracking how much money you have and how many assets you own vs. liabilities will show you if you’re on the path to becoming rich and wealthy. Spending a little time each month to complete a balance sheet will help you track these sums.