Net worth and building wealth

I’ve kept track of my net worth for a few years now. It’s an old habit from when I cared about building wealth over mostly everything else.

Even though my priorities have changed, I still think knowing and tracking your net worth is important. Money isn’t the most important thing there is, but it does give you freedom — and that is important.

If you are in debt or have little savings, you will certainly have fewer options available to you. It becomes more difficult to do things like take time off work, change your career, help someone, start a business or live your life how you want to as you grow older.

Building wealth pretty much comes down to three things.

  • Income
  • Being frugal (spending less than you earn)
  • Saving / investing as much as you can.

The earlier you start, the better. If you start early enough and have a frugal lifestyle, it’s quite possible to retire in your 30’s or 40’s. Most people underestimate how compound interest allows small and regular savings to grow in the long-term. Play about with this compound interest calculator to see what I mean.

You can find a bunch of people who are doing this and are transparent about the numbers. 1500 days (retired already) and thinksaveretire (retiring this year) are two examples. A common theme amongst them is their frugality, high savings percentage and a long term view to investing.

Calculating your net worth

Calculating your net worth is quite simple. There are many ways to do it and I tend to keep things simple.

I have 4 main buckets — property, investments, cash and assets.

Property is equity in house(s). This can be a bit tricky to know exactly, due to house price fluctuations. I just make a conservative guess and tend to update it every few years based on house prices in the area.

Investments is anything which generates interest and you are unlikely to sell anytime soon. They will likely to fluctuate up and down. Stocks, funds, bonds etc.

Cash is anything in the current account.

Assets is anything you own that can turned into a reasonable amount of cash — say, anything over £5K. A car is a good example. I just use a conservative guess and update it every year or so. Again, these might go up or down (most assets tend to depreciate).

Tracking your net worth

I take a monthly snapshot of each of the above. Only the investment / cash buckets change on a monthly basis as explained above. The total gives me my net worth at that time.

You could do it less frequently than monthly. It only takes me 5 mins to do, so I just do it it monthly.

If you’ve never done this, I would encourage you to have a go at it. I think you’ll find it insightful to do.

Some personal reflection

For me, it highlighted the level at which my recent low income and over-spending was eroding my net-worth. It pushed me to set some budgets and cut back on silly things like eating out and impulse purchases. It also highlighted the need to focus on fixing the lack of income.

I knew where my problems were before I started to track my net worth more closely. But, looking at the actual numbers really drove things home for me.

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