One question I often get asked is “How do I know if I’m on the right track financially?” That’s a very open ended question from my perspective. My gut first answer is to respond with the question “Are your needs and some of your wants met?” That elicits a very subjective response based on their individual person’s perspective of their life. My question based response works for right-brained individuals who are more artistic and creative. Some of us, though, are left-brained (I’ll raise my hand here) and we want a measurement to quantify if we are on the right path. If you want to quantify if you’re on the right financial track, compare how your net worth is evolving.
What is Net Worth?
It’s very simple. Your net worth is the value of your assets minus your liabilities. Said another way, it’s the value of everything you have (cash, investments, real estate, and belongings) less everything you owe to someone (mortgage, student loans, credit card debt, personal loans, etc.).
Why is Net Worth A Good Measure in Personal Finance?
You may be thinking that there are other financial numbers that can prove you are on the right financial path. Let’s talk about those for a minute:
- Income
Income, and more specifically growth in income, is certainly a measure of your financial path. If you are making the same thing today that you did when you got your first job in high school, your financial outlook may not look like you wanted. However, if your income has grown (and I hope it has!) you may think that this in and of itself means you are on the right financial path.
I would argue, though, that it isn’t a benchmark to lean on. If you are making more, but spending it all or spending more than you make, your financial path needs a change. We have all heard about celebrities and athletes who made millions, but come out the other side with nothing. Income is a means to making cash flow; however, net worth is what is truly signifying overall wealth.
- Credit Score
Another important financial number is your credit score. MPower Co recommends highly that you monitor your credit reports (only use annualcreditreport.com). Your credit score is something that you can obtain when someone initiates a line of credit for you, or you can pay for on your own. There is no free way to check your credit score.
If you happen to know your credit score, and believe it to be a good one (740-799 is considered very good and over 800 is excellent), it is something to be celebrated. Your credit score, though, truly measures your creditworthiness, not your overall wealth.
Let me give you an example. The individuals that owned the home we had before were the original builders of our home. They had owned the home for over 15 years. They were upside down in the home because they had taken out lines of credit against it over time to do things like put in a slab of concrete and a hot tub. In short, lenders found them to be credit worthy because they gave them lines of credit; however, their uses of credit did not grow them wealth. They had to pay to get out of a home they had lived in for over 15 years.
So, while being creditworthy and having a good credit score is a great building block for minimizing interest payments, it’s not a measure of building wealth. Net worth is.
A Quick Reminder on Net Worth and a Few Interesting Facts
While we are talking about net worth, I want to take a moment to add in a reminder about wealth. A net worth calculation is a very private thing, and making assumptions about others wealth is a waste of time.
In our society we perceive someone’s net worth based on outward signs of wealth (the house they live in, the car they drive, the clothes they wear, etc.). But all you really know is that they spend a lot of money on material possessions. We have no idea how they truly fund those purchases.
The Global Wealth Report for 2021, found that 8% of Americans are millionaires (just over 20 million people). Interestingly, 80% of these millionaires did not inherit their wealth and 50% of the millionaires are over the age of 65. There is the highest concentration of millionaires in New Jersey.
As a reminder that wealth is not about outward signals of wealth, I created our Millionaire Next Door free download. It’s very possible to amass a net worth greater than one million dollars with strategic decisions and focus. This guide can help give you important mindsets to build wealth.
How Net Worth Typically Moves
Young professionals always come to me worried about their net worth, because their net worth is negative. When they add up their assets and then subtract a new mortgage, car loan, and student loans, they find that their assets don’t go far. I gladly speak about how they are in the debt accumulation phase of life. Making smart choices during this phase, though, can really help (i.e. not buying too much home, the nicest car on the market, or taking out more student loans than necessary). As they pay down debt, they move into the wealth accumulation phase of growing wealth.
Fun MPower Co Fact: this is what inspired the check mark in the M of our logo. It represents the debt accumulation phase changing to the wealth accumulation phase.
Monitoring Net Worth Over Time
So, how do you know if you are on a positive financial path? Monitor your net worth over time to see that it is increasing in value. This financial measure can help you ensure that you are using the right building blocks to build wealth. Your net worth over time will show you if you are building assets and minimizing debts over time.
If you’ve never put together a net worth statement, take time to do this! If you want help, head over to our online course Richer Retirement. In this course you will receive the tools and information you need to put together your net worth statement and monitor your net worth over time.
Free Resource – Becoming a Millionaire Next Door
If you found this article on monitoring your net worth to build wealth helpful, you’ll love our free resource on how to become a millionaire next door. Becoming a Millionaire Next Door takes focus and time and having strong financial planning practices! Click on this link to get your free download to be more financially savvy.
