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5 Steps to Calculating and Tracking Your Net Worth (And Why It Matters)

financial independence net worth Jun 18, 2022

As we have previously discussed, your financial independence (FI) number that you are aiming to save is at least 25x your expected annual expenses, which should last for at least 30 years of retirement. However, if you're looking to retire early, then you likely would want to have 30 - 33x your annual expenses in investments. Keep in mind that you may either save this total FI amount as a lump sum, or have enough passive income each year to live off of, or a combination of the two. Your net worth is simply defined as the total value of all of your assets minus the total amount of all of your liabilities. Calculating and tracking your net worth allows you to see where you are on your FI journey, which is why this is one of the first steps to take once you decide to try to reach FI. Let’s discuss the five steps for how you can determine and track your net worth. Keep in mind that most couples will chose to complete this exercise all together, since if you’re married, you own your possessions jointly. 

1. Add up All of Your Assets

What is an asset? An asset is anything that you own of monetary value. For example, if you own a car outright, the asset amount is the current worth of the car (not what you spent on it). Other examples would be your retirement account(s) such as a 401(k), 403(b), 457(b), Roth IRA, traditional IRA, etc. Any physical cash in your possession or cash in your savings account would also be an asset. Assets could also be other valuable items such a jewelry, artwork, furniture, etc, though keep in mind that you would want to know their current worth, not what you paid for them or what you think that they are worth. Although many items that you own have some type of value, most will not include all the small items they own in calculating their net worth. 

2. Add up All of Your Liabilities 

What is a liability? A liability is something that you still owe money on. I’m sure one of the top things that comes to mind for you is your PA student loan amount. Yes, any debt amount would be considered a liability. Other liability examples include credit card debt or other consumer debt.

Houses are a bit tricky. If you own a house, it is likely both an asset and a liability. For example, let’s say that you own a $300,000 house, but still have $250,000 left on the mortgage. In this case, the current worth of your house ($300,000) would be an asset, but the $250,000 mortgage would be a liability. 

3. Decide Whether or Not to Include Your House into Your Net Worth Calculation

Although we just reviewed how a house can be considered both an asset and a liability, there is much debate in the FI community whether or not to include your home value in your net worth calculation. Some argue that they are going to need to live somewhere in retirement, so they should not include their home value into their net worth calculation, as they think that they will likely live in that house for many years to come. However, others argue that they may not be living in their current house in the future, but rather possibly may live in a more affordable residence if they decide to downsize or move to utilize geoarbitrage to their advantage. 

Whether or not to include your home value into your net worth calculation is clearly a personal decision, but my husband and I personally do include it. Here’s why: although we live in a house, we likely will not live here for many years, and there’s only the slimmest chance that we would likely live here throughout our whole retirement. Additionally, the value of our house has significantly increased since we bought it for the following reasons: we have been renovating our home over the past four years since we moved in (because we had initially thought we were going to live here for quite awhile, in addition to the house being “stuck in the ‘80s”), and there has been a ton of development going on in our city near us. Big fancy houses being built around us are helping to increase the value of our house. So when we do decide to sell our house (depending on how the market is doing), we likely would be able to make a fair profit, which would help to increase our net worth further by investing it or putting down more equity into our next residence. The amount that we use for our house value while calculating our net worth is currently estimated conservatively since we do not know the actual value at this time (since the house in the middle of a renovation), nor do we know what the housing market will look like once we do sell it. 

If you’re a home owner, you ultimately have to decide for yourself whether or not to include the value of your house into your net worth. Certainly if you also invest in real estate by owning properties, then the values of your properties and the mortgages that you owe would be both assets and liabilities to factor in. 

4. Subtract Your Liabilities From Your Assets (Assets – Liabilities = Net Worth)

The final step of calculating your net worth is to simply take the total value of your assets and to subtract the total amount of your liabilities. This number is your net worth. Phew, that wasn’t too bad! Now, why is your net worth important? It gives you a basic overview of how your finances are doing, and where you are in your financial journey on your way to FI. Is your net worth number a negative number (“in the red”), or a positive number (“in the black”)? If your net worth is a negative amount, try not to fret! I would bet that most of your liabilities are student loan amounts, which is why it’s important to try to pay off your loans quickly. If your net worth is a positive amount, congrats! You’re well on your way to reaching FI. 

5. Continue to Track your Net Worth

Now that you have taken the time and energy to calculate your net worth, how are you going to continue to track it going forward? Some choose to simply use a pen and paper, adjusting their numbers periodically to see where their net worth is. Others will use a tool like Excel to do so, plugging their new asset and liability numbers in as they fluctuate. These options are a bit tedious and time consuming. However, there is a better solution! There are some personal net worth calculators and tracker tools, and the one that I would recommend is Personal Capital. Through Personal Capital, you can have all of your savings, checking, retirement accounts, as well as loans, assets, and liabilities listed in one place. You can link your online accounts through Personal Capital, so that when you login either online or through the app, your net worth is calculated in real time! The best part is that Personal Capital is a completely free tool! If you would like to sign up to start tracking your net worth, use the link below.

Disclosure: This link is a referral link, and I would receive a small commission if you choose to track your net worth for free through Personal Capital.

Sign up here to receive $20 if you link at least one valid investment account (such as a brokerage account, 401(k), IRA, etc.) containing a balance of more than $1,000 USD within 30 days of registering (Personal Capital currently only supports U.S. based financial institutions). 


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