Now let’s cover what could well be the most important action you ever take toward financial success: measuring your progress.
The simplest vital indicator for monitoring and actually achieving financial independence is your net worth — the amount by which your assets exceed your liabilities. That single number, computed and monitored regularly, has the power to tell you if you’re headed in the right direction — whether you are becoming more or less financially independent.
The act of monitoring your net worth regularly is more important than the number itself. It teaches you, in simple and direct terms, whether your financial activities — working, saving, borrowing, spending — are leading you in the right direction, or not.
Simply put, your net worth needs to grow in most years, which will indicate you are “living below your means.” If it stays the same, that means you aren’t saving, and must plan on working indefinitely. If your net worth goes down for very long, you could be headed for a lifetime of indebtedness to others.
- If you use financial software to manage your accounts, then make your net worth view the default — so it’s never far from mind!
- Otherwise start computing your net worth now: Add up the values of all your cash bank accounts like checking and savings accounts. (These are assets.)
- Next add in the current value of any and all investment accounts. If you have any retirement accounts that haven’t already been considered, add those in too.
- Next, add in the fair market value of significant personal property such as vehicles and your home. If you have mortgages or loans, you then need to subtract the outstanding balances for those debts. (Those are liabilities.)
- Subtract other liabilities such as credit card debt or student loans.
- Post your net worth, along with the date, near your desk. Now, make a note on your calendar to update this number about every three months.
- Over time, add other important financial indicators to your net worth calculation: your asset allocation, some diversification metrics, annual portfolio performance, the present value of your pensions and Social Security, and your projected monthly safe withdrawal.